The ABC method is most often used by companies to analyze stock and inventory to find out which products bring them the most money. But you can also apply this method to customer segmentation — to find out which customers are key for you and whether you are investing time and energy into those that it is unnecessary for.
What is Pareto Principle
The ABC analysis is based on the Pareto Principle, otherwise known as the 80/20 rule, invented by an Italian economist of the same name. He says that 80% of the results come from 20% of the causes. In business terms, this can be translated to mean that if 80% of your profits come from only a 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 money they make you.
Group A includes 10 % of customers, who account for 75 % of your turnover. These are your TOP customers, who you should consistently take care of.
Group B includes 20 % of customers, who account for 15 % of your turnover. If you focus on these customers, they may move over to group A.
Group C includes 70 % of customers, but they account for 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 software
The easiest way to perform an ABC analysis is to use analytical tools, such as those in your ERP system or CRM system. You store all your business data in them, which serves as the basis for calculating the ABC analysis. We will show you how ABC analysis works using our RAYNET CRM as an example.
In RAYNET you will find an analysis section where you can view your business results from different angles. You can explore, for example, the success rate of sales reps, profit development or the ABC analysis.
After selecting the ABC analysis, the system will perform it automatically and show you the results immediately. You can view them in a graph or table. All you need to do for the analysis to work as intended is to continuously record information about your clients and orders in the CRM system.
Each column in the chart represents a separate client. The columns have three colors according to categories A, B or C. Green clients contribute the most to the turnover, yellow clients the least.
When you hover over a column, you will see detailed information about the client, for example:
- Total sales
- Percentage of turnover
- Exact profit
You can see the same information clearly in the tabular version of the ABC analysis.
The ABC analysis in RAYNET also includes advanced filters that allow you to customize the results of the analysis, for example:
- Set the time period you want to analyze
- Adjust the contribution to turnover percentages in order to place clients in individual groups
- Or select only a specific group of clients for whom you want to conduct the analysis
If you do not have CRM software or other analysis tools, you can also perform the ABC analysis in an Excel spreadsheet. But you have to manually calculate the percentage of turnover and try to figure out which group each customer belongs to.
If you want to work smartly and efficiently with your business data, give CRM software a try. See for yourself whether automated data evaluation will save you and your team a lot of time and effort. You will also benefit from other useful features such as a well organized client database, a sales pipeline for tracking the stages of deals, or a mobile app for working on the go.
How to work with ABC analysis results
Once you have the results of the ABC analysis in front of you, you can further work with them in several ways.
- Evaluate how much time you invest in each customer. For example, if you find out that your salespeople are spending the same amount of time with customers in groups C and A, that's a mistake. Take the time spent on group C customers and focus it on group A and group B customers. Try to automate as many processes as possible for group C.
- Analyze customers in group B separately. You will probably find that at least some of them have the potential to move into group A. Give them a push by expanding the solutions you provide or by just giving them more attention. Often, customers who have the potential to be in group A are in group B simply because they don't get enough attention.
- Finally, consider group A separately. Companies often have the problem of getting overly fixated on their TOP clients. Yes, it is definitely worth paying them more attention than C customers, but if they are already spending so much money with you, you don't need to shower them with attention because of it. Feel free to devote some of your efforts to B customers, so you can turn them into A-class customers soon.
TIP: To make sure you have enough time for your customers, get inspired by the advice in the article on time management for salespeople.
