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Productivity: law of the ABC criterion, what is it?
Feb 1, 2022 6:00:38 PM5 min read

Productivity: law of the ABC criterion, what is it?

We are sure that one of the things that all entrepreneurs want to know is how to get more profit from their business and live more peacefully. And we are safer in saying that 80% of the benefit of most companies comes from 20% of customers. What? How is that?

Yes, we present you with the ABC technique. This management technique (initially from the study of inventories) has been extrapolated to analyze any area of a company.


What is ABC analysis?

This simple, but effective technique consists of simply categorizing and seeing which part it represents, whether it is the customers, the products, the product families... in 3 parts.

  • Category A -They contribute 80%
  • Category B -They contribute between 10-20%
  • Category C -They contribute between the remaining 5% - 10%

What is the ABC method for?

The magic of this technique is that when you do this activity, you will see that generally, a small part of the customers are giving you most of the profit.

This is what is called "Pareto's Law" which tells us that 80% of the results come from 20% of the factors. This will help us to get to know our company in depth to later develop appropriate business strategies.


ABC study for customers

This technique can only be applied to solvent businesses, which have many customers that bring them benefits; if the business can barely pay the debts and endure, it is not convenient to get rid of customers. On the other hand, it is convenient for a business that is doing well because that way you will have more time to serve that 20% of clients that report 80% of the profit, as we will now discuss.

We are going to start with the study of customers, using the ABC technique, that is, we have to list all the customers, the sales, and the profit that the company obtains with them; then, we have to organize them.

Customers A are those that represent 80% of our profit, customers B are those that we obtain from 80 to 95% of our profit, and customers C are those from whom we obtain 95 to 100% of our profit.


Why is this analysis important?

This information is vital, since it will allow the company to focus on its most important customers, and take care of them so that they continue to choose your company and increase their purchases.

In this way, with this information, you will be able to know whose email to answer first, whom to call from time to time, whom to give promotional gifts to, or which customers you need to take into account the most: the customers from group A.

This technique will allow your company to focus on the important tasks, and discard the things that do not bring benefits.

Thanks to this type of information, we will be able to know in a very clear way who our main customers are and organize them by sales, for example, or by any other criteria that we are interested in segmenting.


Types of customers we can have

If you have to take care of someone, those are your type A customers because they represent your main benefits. You must pamper them, have details with them and above all, make sure they are very happy with your services.

On the other hand, you must take care of type B customers but they're not as important as the first ones. Moreover, we can ignore type C customers since the time wasted taking care of these customers can be used, for example, to look for more type A customers.


ABC analysis of suppliers, sales...

This same technique can be applied not only to your company's customers but also to the lines of business and products that you currently have in your business.

This also serves even to carry out a study of the social networks of your company, and improve your communication strategy, since, if you detect that one or two social networks make several reports, and others very few, you should focus your efforts on the networks that give you more benefit.

This may seem like common sense, but until you put the numbers on the table you don't realize how much you can improve in your business. Remember that, to improve things in your company, you first need to analyze them; the first step is to measure.

In addition, you can combine this information with your CRM tool and in this way consult it much faster. The use of business software will make your life easier and will prevent you from having to do it manually.


How is ABC analysis calculated?

Next, we are going to do it step by step, so you know how to do it. Let's remember that it can be applied to the demand for purchases, inventories, costs, logistics, warehouse, customers, suppliers, sales...

Like everything, it becomes clearer with an example:

  • Customer A: 50% billing
  • Customer B: 20% billing
  • Customer C: 10% billing
  • Customer D: 9% billing
  • Customer E: 6% billing
  • Customer F, G, H, and I: 5% billing

As we have mentioned, to do it correctly we will have to group in group A those who represent 80% of the billing; in this case, the class A, B, and C customers.

Those of class B that represent the next 15% are client D and E, and therefore class C are the rest, it would look like this:

  • Customers A: A, B, C
  • Customers B: D y E
  • Customers C: F, G, H, and I


When is ABC analysis used?

This should be used to get to know our company a little better, and above all to differentiate between important and superfluous things; also, to differentiate which things should be given the most attention and which should be given less attention.

Therefore, this tool is perfect for management since it will be a good starting method to carry out the study and later develop strategies that allow the company to beat its competitors.

The best thing about this technique is that it will allow you to analyze your company's data to make better decisions. This inventory control system has also proven to be very useful for studying and learning about the demand for the products on offer.

Finally, we can say that thanks to this, we will be able to make better forecasts, and in this way forecast the supply of our business more efficiently.

So, will you use this management technique in your company? Do you think it's more useful to find new bigger clients and get rid of small ones than not to do it at all? Tell us what you think!




Drew's editorial team

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