Not every product in your catalogue deserves the same attention. ABC analysis gives you a disciplined way to work out which SKUs drive your business and which are quietly costing you money to keep around.
What ABC analysis actually measures
ABC analysis ranks your SKUs by contribution — usually revenue, but sometimes gross margin or units sold — and splits them into three bands. A-items are typically the top 10-20% of SKUs that generate 70-80% of revenue; B-items are a middle band contributing a modest, steady share; C-items are the long tail, often 50%+ of your catalogue by SKU count but a small fraction of revenue.
The value isn't the classification itself, it's what you do differently for each band: tighter forecasting, more frequent counts and better supplier terms for A-items, and a much lighter touch — or active rationalisation — for C-items that aren't earning their shelf space.
Running the analysis in practice
Pull at least 6-12 months of sales data per SKU (longer if your business is seasonal) and rank by total revenue or margin contribution over that period, not just current month, so a single promotional spike doesn't misclassify a normally slow item. Calculate cumulative percentage of total revenue as you move down the ranked list, and set your A/B/C cut-offs where the curve visibly bends rather than at arbitrary round numbers.
Most inventory management and IMS/ERP platforms will generate this automatically once your sales history is in the system; if you're still on spreadsheets, a simple sort-and-cumulative-sum formula in Excel or Google Sheets does the job for a catalogue of a few hundred SKUs.
Applying different treatment by band
- A-items: weekly or more frequent cycle counts, tightest reorder point discipline, negotiated better supplier pricing given the volume, and priority placement in warehouse layout close to packing stations.
- B-items: monthly counts, standard reorder automation, periodic review for promotion into A or demotion into C.
- C-items: quarterly counts at most, minimal safety stock, and active review for discontinuation, consolidation into a single variant, or a shift to made-to-order or dropship fulfilment rather than held stock.
Some retailers add a fourth category for genuinely strategic loss-leaders or halo products that sell in low volume but drive traffic or brand credibility — these deserve a manual override rather than being rationalised away purely on the numbers.
The case for SKU rationalisation
A catalogue that has grown organically over several years commonly accumulates dead or near-dead SKUs — colour variants nobody buys, discontinued supplier lines still listed, or test products that never found demand. Each one carries a quiet cost: warehouse space, cycle-count time, listing maintenance across channels, and diluted marketing and search attention spread across products that will never justify it.
Rationalising without damaging customer trust
Cutting SKUs needs care where customers have bought a product before and might reasonably expect to reorder it — check for repeat-purchase patterns before delisting, and where possible offer a clear substitute rather than simply making the item vanish. Clear remaining stock through a defined discount or outlet channel rather than an indefinite 'reduced' listing that quietly ties up warehouse space for months while barely moving.
Communicate discontinuations proactively to loyal repeat buyers of a specific line where you have the data to identify them, offering an alternative — this converts what could be a lost customer into a managed transition and protects the relationship.
Making ABC analysis a recurring habit, not a one-off project
SKU performance shifts constantly as products age, trends move and competitors enter your space, so treat ABC analysis as a quarterly or biannual review rather than a single exercise you run once and forget. Track how many SKUs move bands each cycle — a stable classification suggests a mature, well-understood catalogue, while heavy churn between bands suggests your range needs more active management than it's currently getting.
Aligning ABC analysis with purchasing and marketing decisions
Once a classification is in place, use it to shape more than just counting frequency — purchasing teams should weight negotiation effort and payment term discussions toward suppliers of A-items, since a small percentage improvement in cost or terms on your highest-revenue lines dwarfs the same improvement on a slow-moving C-item. Marketing spend allocation benefits from the same lens: paid search and email promotion budgets often perform better directed toward proven A- and B-band performers than spread evenly across a catalogue where most SKUs contribute little revenue individually.
Some retailers go further and build ABC classification directly into their product page templates and merchandising rules — surfacing proven bestsellers more prominently in on-site search and category navigation, and de-prioritising long-tail C-items that otherwise dilute a customer's browsing experience without materially affecting revenue if quietly demoted in visibility.
A simple starting framework for a first ABC review
- Export 6-12 months of per-SKU revenue (or margin) data from your platform or IMS.
- Rank descending and calculate cumulative percentage of total revenue.
- Mark the cut-off for A-items where cumulative revenue reaches roughly 70-80%, and for B-items where it reaches roughly 90-95%.
- Review any surprising results manually — a new product with limited history or a strategic loss-leader may need a manual override rather than a purely numbers-driven classification.
- Set a recurring calendar reminder to rerun the analysis, rather than treating this first pass as a one-off exercise.
Putting This Into Practice
Getting ABC analysis and SKU rationalisation: focusing effort on what actually sells right is rarely a one-off task — it tends to need revisiting as the rest of the business changes around it. This connects directly with E-Commerce Bookkeeping and Accounting Software: What UK Retailers Actually Need, which walks through the practical detail.
For related reading: It's worth reading this alongside Business Insurance Essentials for UK Online Retailers: What You Actually Need and What You Don't before making a final decision.