ABC analysis helps Shopify sellers identify their most profitable products by categorizing SKUs into three groups: A-grade items (top 20% generating 80% of revenue), B-grade items (15% of revenue), and C-grade items (50% of SKUs but only 5% of revenue). This method improves inventory management by focusing on high-performing products and minimizing waste from low-demand items.
Key Takeaways:
- A-grade items: High-priority, top sellers. Monitor frequently and keep safety stock.
- B-grade items: Moderate performers. Bundle with A-items or review monthly.
- C-grade items: Low revenue contributors. Discount, bundle, or discontinue if needed.
Steps to Perform ABC Analysis:
- Export 12 months of SKU data from Shopify (units sold, prices, revenue).
- Calculate annual consumption value for each SKU.
- Rank SKUs by revenue contribution and classify into A, B, or C categories.
Use tools like Forthcast ($19.99/month) to automate ABC analysis, forecast demand, and manage inventory efficiently. Regularly update your analysis - quarterly or after major sales events - to stay aligned with changing trends.
ABC Inventory Classification Guide: A-Grade vs B-Grade vs C-Grade SKUs
ABC Analysis Explained - Inventory Classification in Microsoft Excel
Preparing Your Shopify Data
Good data organization is the backbone of an accurate ABC analysis. Before diving into SKU segmentation, you'll need to gather the right information from your Shopify store. Thankfully, Shopify provides tools to make this process manageable, whether through built-in reports or manual exports.
How to Export SKU Data from Shopify
Shopify includes an "ABC analysis by product" report in the Reports section of the admin panel. However, this feature isn’t accessible to everyone - only certain Shopify plans include this report. If you’re on the Shopify Basic or Lite plans, you’ll need to rely on a third-party reporting app from the Shopify App Store.
For more customized analysis, you can export data from Shopify's Sales Reports or Product Performance Reports into a spreadsheet. Your export should include the following key data fields: SKU list (with all variants), units sold, selling price or unit cost, and total revenue per SKU. To get a clear picture of trends and seasonality, make sure you’re working with at least 12 months of sales data.
Once you’ve exported this data, it’s time to set up your spreadsheet for analysis.
Setting Up Your Data in a Spreadsheet
Structure your spreadsheet with these columns: Product Name/SKU, Units Sold, Unit Price, Total Revenue, Percentage of Total Revenue, and Cumulative Percentage. Remove any currency symbols from the data to avoid issues with formulas.
"Streamline your report using simple inventory classifications, such as revenue generated by product name or category. There's no need to break each one down by color or size just yet." - Elise Dopson, Shopify
When preparing your data, exclude new product launches that lack sufficient historical data. Including these items can distort your results and make it tougher to identify meaningful patterns. The goal is a clean and reliable dataset that reflects your store’s performance over a substantial timeframe.
How to Perform ABC Analysis
Once your spreadsheet is prepped, you can start sorting your inventory into categories by following these three steps.
Calculate Annual Consumption Value
Begin by figuring out the Annual Consumption Value for each SKU. To do this, multiply the total units sold over 12 months by the unit price (or cost). For example, if you sell 500 espresso machines at $200 each, the consumption value is $100,000. Similarly, selling 3,000 coffee scoops at $5 each results in a value of $15,000. In your spreadsheet, add a column and use a formula like this:
=Units_Sold * Unit_Price
Make sure to use a full year of data to account for any seasonal fluctuations.
Rank SKUs and Calculate Cumulative Percentages
Next, sort your SKUs in descending order based on their Annual Consumption Value. This ensures your highest revenue generators are listed at the top. Then, calculate the percentage contribution of each SKU to your total revenue using this formula:
=SKU_Value / Total_Revenue
Add these percentages together in a cumulative column to see a running total. This step highlights how much each product contributes to your overall revenue - a process that aligns with the Pareto Principle.
Assign SKUs to A, B, and C Categories
Finally, break your SKUs into A, B, and C categories based on their cumulative revenue percentages:
- A-grade items: These account for roughly 80% of your total revenue but usually represent only 10% to 20% of your product count. These are your top performers.
- B-grade items: These contribute the next 15% of revenue, covering cumulative percentages from about 80% to 95%. They often make up around 30% of your SKUs.
- C-grade items: These represent the remaining 5% of revenue, typically making up about 50% of your total SKUs.
"Separating your inventory into these three categories will give you a good indication of what items you need to stock more, and which items you need to reduce stock value." – Shopify
If you’re managing a large product catalog, consider using reporting tools to automate these calculations and keep your categories updated as trends evolve.
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Using ABC Analysis to Manage Inventory
Different Strategies for A, B, and C Items
Managing inventory effectively means tailoring your approach to each SKU category. A-grade items are your top performers, generating 80% of your revenue. These products need close monitoring - check them daily or weekly, keep higher safety stock levels, and work with multiple suppliers to avoid running out. Use this formula to calculate reorder points: (Average Daily Unit Sales × Average Lead Time) + Safety Stock. Highlight A-items in your promotions to maximize their sales potential.
B-grade items fall in the middle and require moderate attention. Review these monthly and maintain balanced stock levels to avoid tying up too much capital. They’re great candidates for bundles or add-ons with A-grade items, which can help move them faster while increasing your average order value.
C-grade items contribute only about 5% of revenue but often make up half of your inventory. These require minimal oversight. Order them in bulk to cut down on administrative costs. If they’re not selling, consider discounting, bundling with A-items, or discontinuing them to free up space and resources.
To handle these tasks efficiently, automation can make a big difference.
Automate Inventory Management with Forthcast
Automation simplifies ABC analysis, especially for businesses with large product catalogs. Managing inventory manually with spreadsheets can be tedious and prone to errors. Tools like Forthcast take the guesswork out of this process by automating your ABC inventory strategies.
Forthcast integrates with Shopify to pull real-time data, recalculates sales velocity every night, and automatically adjusts SKU categories. Its SKU-level analysis offers 6-month demand forecasts, helping you decide exactly what to order and when for each category.
For A-grade items, Forthcast provides smart reorder alerts, notifying you before stock levels get too low. It also detects unusual sales patterns, flagging potential supply chain issues early. The platform’s AI-driven forecasting takes lead times into account, so you can set reorder triggers earlier for products with longer delivery windows. Plus, with automated purchase order management, you can create and send supplier orders for all categories in just one click, saving time and reducing errors.
For $19.99/month (with a 14-day free trial), Forthcast ensures you maintain optimal stock levels across your A, B, and C categories - no manual effort required.
Keeping Your SKU Segmentation Current
ABC analysis is not something you can set and forget. SKU performance shifts over time due to customer preferences, seasonal trends, and changes in market demand. An item that’s a top performer today might drop in popularity within months, while a slow mover could suddenly gain traction. For example, in 2016, Star Wars costumes soared to A-grade status during the sequel launch, only to slide into C-grade as the hype faded. This constant evolution means you need to regularly revisit your inventory strategy to stay aligned with market realities.
"ABC analysis isn't something you do once and forget, it only stays accurate if you update it as your business evolves." – Bhoomi Singh, Sumtracker
Ignoring updates to your ABC categories can lead to costly issues like overstocking low-demand products, which ties up capital, or understocking best-sellers, which directly impacts revenue. In 2023, inventory distortion from overstocks and out-of-stocks cost retailers globally a staggering $1.77 trillion. In the US and Canada alone, these issues result in approximately $350 billion in lost sales annually.
When to Review Your ABC Categories
It’s best to review your categories at least quarterly. For fast-moving or seasonal inventory, consider monthly updates. Quarterly reviews help you catch shifts in demand before they affect your bottom line.
Special events like Black Friday Cyber Monday (BFCM) or holiday shopping peaks are also key moments to reassess your classifications. Newly launched products require particular attention. Without historical sales data, these items should be reevaluated after three to six months to determine their proper category. In fact, up to 50% of your inventory might need reclassification every quarter or year due to changing demand patterns.
Add Profit Margins to Improve Your Analysis
Revenue alone doesn’t give you the full picture. High-margin, low-volume products may deserve A-grade status over high-volume, low-margin items. Including profit margins in your analysis ensures your focus is on products that truly boost profitability.
To calculate gross margin, use the formula: (Revenue – COGS) / Revenue. This metric can help refine your ABC assignments. For instance, a specialty product selling 50 units per month at a 60% margin might warrant A-grade attention, even if a commodity product sells 200 units at just a 15% margin. By prioritizing high-margin items, you’ll ensure your efforts are concentrated on what drives actual profitability, not just sales volume.
Conclusion
Key Benefits of ABC Analysis
ABC analysis helps businesses focus on what matters most by identifying the top 20% of products that generate 80% of revenue while flagging underperforming items that tie up resources. By segmenting inventory, you can allocate budgets, warehouse space, and management efforts more effectively. For example, high-value items (A-grade) receive priority, while low-value items (C-grade) are managed more efficiently. C-grade items, which often make up about 50% of inventory but contribute only 5% of revenue, can be discounted, bundled, or liquidated to free up capital and reduce waste.
This method also simplifies operations, particularly with cycle counting. High-value A-items are audited weekly, while lower-priority C-items are checked quarterly. This balance improves inventory accuracy without overloading your team with unnecessary work. These strategies tie directly into earlier recommendations for handling A, B, and C items.
"By categorizing products based on their value and usage, you have greater insight into what slow-moving products you're losing money from, so you can discount them and make room for more profitable products." – Jara Moser, Digital Marketing Manager, Shopventory
Getting Started with ABC Analysis
If you're ready to implement ABC analysis, start by exporting your last 12 months of SKU data, including units sold and selling prices. Calculate the annual consumption value for each SKU, rank them in descending order, and classify them: the top 80% as A, the next 15% as B, and the remaining 5% as C. From there, set reorder points for A-items, maintain balanced stock for B-items, and use strategies like bundling or discounting to manage C-items.
For those who want to skip manual calculations, Forthcast offers an automated solution. At $19.99/month (with a 14-day free trial), it uses AI to handle demand forecasting, monitor inventory, and send smart reorder alerts. It also provides 6-month demand projections, tracks data accuracy, and offers features like bundle breakdowns and service level customization. This tool ensures your ABC categories stay updated as your business grows, helping you maximize profitability with minimal effort.
FAQs
How often should I update my ABC analysis for my Shopify store?
Regularly updating your ABC analysis is essential to ensure your inventory strategy stays in sync with current sales trends and demand patterns. How often should you do it? That depends on your business model and sales cycle. However, many Shopify merchants find that reviewing their analysis either quarterly or monthly works well.
Frequent updates allow you to spot shifts in product performance. This helps you fine-tune stock levels, focus on your best-selling SKUs, and steer clear of issues like overstocking or running out of stock. If you run a seasonal business, this step becomes even more crucial - make sure to update your analysis both before and after your peak sales periods.
What are the benefits of using ABC analysis for managing inventory?
ABC analysis is a method that helps merchants zero in on their most important products by dividing inventory into three categories - A, B, and C - based on their impact on sales and profitability. A-grade items are the stars here, often responsible for the largest share of revenue. These high-demand products should take priority in stock management to ensure they’re always available, reducing the risk of stockouts that could hurt sales.
By organizing inventory this way, merchants can create more targeted strategies. For example, they might keep higher stock levels for A items to meet demand, while cutting back on overstocking slower-moving C items. This kind of segmentation not only boosts cash flow but also trims down surplus inventory and streamlines operations. It’s a straightforward yet effective way to take control of inventory and improve overall efficiency.
How can I use automation to perform ABC analysis for my Shopify store?
Automating ABC analysis for your Shopify store is straightforward when you have the right tools. Inventory management apps that sync with Shopify can automatically sort your SKUs into A, B, and C categories. These classifications are based on factors like sales data, revenue contribution, or order volume.
These tools work by analyzing your sales and inventory data in real time. This means your classifications are always current, and you don’t have to spend time updating them manually. Automating this process helps you prioritize inventory, allocate resources more efficiently, and concentrate on scaling your business.
