The ABC method is most often used by companies to analyze warehouses and inventories to find out which products bring them the most money. But you can also apply the method for customer segmentation - you will find out which customers are key for you and whether you are investing time and energy in those for whom it is unnecessary.
What is Pareto Principle
ABC analysis is based on the Pareto Principle, which was invented by the Italian economist of the same name. He says that 80% of the results come from 20% of the causes. This can be translated into business practice by saying that if 80% of your income comes from only one-fifth of your clients, you should pay extra attention to them.
What is the ABC method
The ABC method goes a few steps further than the Pareto Principle. It divides customers into three categories (A, B and C) based on how much they earn you.
Group A includes 10 % of customers who make up 75 % of your turnover. That is, your TOP customers, to whom you should pay constant attention.
Group B consists of 20 % of customers who bring 15 % of your turnover. If you target these customers, they may move to the A group.
Group C consists of 70 % of your customers, but they earn you only 10 % of your turnover. These are small purchases that generate some revenue but don't bring you much value. You want to spend as little time as possible on these jobs.
How to perform ABC analysis using CRM
The easiest way to perform an ABC analysis is to use analytical tools, such as those in your ERP system or CRM. You record all your business data in them, which serves as the basis for calculating the ABC analysis. We will show how the ABC analysis takes place using the example of our RAYNET CRM.
In RAYNET, you will find an analysis section where you can view your business results from different angles. You can examine, for example, the success of traders, the development of profit or ABC analysis.
After selecting the ABC analysis, the system will perform it automatically and immediately show you the results. You can view them in a graph or table. So the only thing you need to perform the analysis is to continuously record your clients and orders in the CRM.
Each column in the graph represents a separate client. The columns have three colors according to categories A, B and C. Green clients have the largest share of turnover, orange clients the smallest.
When you move the cursor over the column, you will see detailed information about the client, for example:
- total sales,
- percentage of turnover
- or exact profit.
You can see the same information clearly below in the tabular version of the ABC analysis.
ABC analysis in RAYNET also includes advanced filters, with which you can adjust the analysis results according to your own requirements. For example:
- you set the time period you want to analyze,
- adjust the profit shares to include clients in individual groups,
- or you select only a certain group of clients for which you want to perform the analysis.
If you do not have a CRM or other analysis tool, you can also perform ABC analysis in an Excel spreadsheet. But you have to manually calculate percentages of turnover and gradually find out which group they belong to for each customer.
If you want to work with business data smartly and efficiently, you'd better try CRM in the open. See for yourself whether automated data evaluation will save you and your salespeople work. To do this, you can use other useful functions such as a clear directory of clients, a sales funnel for tracking the status of orders or a mobile application for the field.
How to work with the results of ABC analysis
Once you have the results of the ABC analysis in front of you, you can further work with them in several ways.
First of all, evaluate how much time you invest in each customer. For example, if you find that your salespeople are spending the same amount of time on customers in groups C and A, that's wrong. Take the time devoted to customers from group C and concentrate it on customers from groups A and B. Try to automate as many processes as possible for orders from group C.
Separately analyze the customers in category B as well. You will probably find that at least some of them have the potential to move to category A. Give them a boost, for example, by expanding the solution you provide them or just giving them more care. Often, potential A customers are in group B simply because they don't have enough attention.
Finally, think separately about group A. Companies often have the problem of focusing too much on their TOP clients. Yes, they're definitely worth paying more attention to than C-customers, but if they're already spending so much money with you, you don't need to overindulge them. Feel free to dedicate part of the effort to category B customers, so that you can quickly turn them into A-class clients.
TIP: In order to have enough time for customers, get inspired by the advice in the article on time management for salespeople.