In most Shopify stores, 20% of SKUs generate 80% of revenue. ABC analysis makes this visible — and tells you exactly where to focus your inventory management effort.
There are two types of Shopify inventory management: the kind that treats every SKU the same and the kind that doesn't.
Treating every SKU the same sounds fair. In practice it is catastrophically inefficient. A product that generates £40,000/year and a product that generates £400/year are not equally important — but if they both have the same safety stock policy, the same reorder review frequency, and the same management attention, you are allocating resources in inverse proportion to their value.
ABC analysis is the tool that fixes this. It ranks every SKU by revenue contribution and assigns management policies accordingly.
ABC analysis segments your product catalogue into three classes based on cumulative revenue contribution:
| Class | Revenue contribution | Typical % of SKUs |
|---|---|---|
| A | Top 80% of total revenue | 10–20% of SKUs |
| B | Next 15% of total revenue | 30–40% of SKUs |
| C | Bottom 5% of total revenue | 40–60% of SKUs |
The insight is that a small number of products (A class) drive the vast majority of your revenue, while a large number of products (C class) contribute almost nothing. Yet without analysis, they all receive roughly equal operational attention.
Export 12 months of sales data from Shopify by SKU. You need: - SKU identifier - Units sold in the period - Revenue generated in the period
List every SKU from highest to lowest revenue.
For each SKU, calculate: - Revenue as a % of total revenue - Cumulative % as you move down the list
Example (simplified):
| SKU | Revenue | % of total | Cumulative % | Class |
|---|---|---|---|---|
| SKU-001 | £28,400 | 22.4% | 22.4% | A |
| SKU-002 | £19,200 | 15.1% | 37.5% | A |
| SKU-003 | £14,800 | 11.7% | 49.2% | A |
| SKU-004 | £11,200 | 8.8% | 58.0% | A |
| SKU-005 | £9,600 | 7.6% | 65.6% | A |
| SKU-006 | £7,400 | 5.8% | 71.4% | A |
| SKU-007 | £5,200 | 4.1% | 75.5% | A |
| SKU-008 | £4,800 | 3.8% | 79.3% | A |
| SKU-009 | £3,200 | 2.5% | 81.8% | B |
| ... | ... | ... | ... | B |
Continue until you reach 95% cumulative — everything from there is Class C.
Once every SKU has a class, assign differentiated management policies (see below).
This is where ABC analysis pays off. Different classes warrant completely different approaches.
These SKUs cannot fail. A stockout on a Class A product is extremely expensive — both in lost revenue and in customer trust damage.
Recommended policies: - Safety stock: high (2–3 weeks of supply, higher service level target: 98–99%) - Reorder frequency: weekly or triggered by real-time alerts - Cycle count frequency: monthly - Supplier relationship: Tier 1 (strategic partner), share rolling forecasts - Lead time buffer: maximum - Dead stock tolerance: none — address underperformance immediately
These SKUs contribute meaningfully and warrant solid management, but can tolerate slightly more risk than A items.
Recommended policies: - Safety stock: moderate (1–2 weeks of supply, 95% service level) - Reorder frequency: bi-weekly or based on reorder point alerts - Cycle count frequency: quarterly - Supplier relationship: Tier 2 (active management) - Dead stock tolerance: review at 90 days without sale
These SKUs generate very little revenue relative to the inventory investment required to maintain them. The right question for every C-class SKU is: does the gross profit justify the carrying cost and management overhead?
Recommended policies: - Safety stock: minimal or none (1 week or demand-driven only) - Reorder frequency: only when stock hits zero or near-zero - Cycle count frequency: bi-annually - Supplier relationship: Tier 3 (transactional) - Dead stock tolerance: review at 60 days — low threshold for liquidation or discontinuation - Actively question whether each C-class SKU should remain in the catalogue
ABC analysis is not just a reporting exercise. Its value comes from acting differently on A, B, and C items. If you run the analysis and then treat everything the same, you have wasted the effort. The point is differentiation.
Standard ABC analysis ranks by revenue. But revenue alone misses two important dimensions:
Margin-adjusted ABC A product generating £20,000 in revenue at 15% margin contributes £3,000 gross profit. A product generating £8,000 at 55% margin contributes £4,400. By revenue, the first product ranks higher. By profit, the second does.
Running ABC on gross profit rather than revenue gives you a more accurate picture of which products deserve management investment.
Volume-adjusted ABC (for operational planning) For warehouse operations, high-volume SKUs (many units sold, even at low price points) drive picking and packing activity. An ABC analysis on unit volume helps optimise warehouse layout — place A items by volume closest to the packing station.
Combining dimensions For a complete picture, run three separate ABC analyses (by revenue, by margin, by volume) and compare the results. A product that is Class A on all three is your true strategic product. One that is Class A by revenue but Class C by margin deserves a pricing review.
ABC classes are not permanent. Rerun the analysis every quarter. Products move between classes as:
A product's class should determine its management policy in the current period. Historical class is useful context but should not dictate current policy.
The most valuable use of ABC for many stores is not management differentiation — it is SKU rationalisation. Using the data to decide which products to discontinue.
The business case for discontinuing a C-class product:
The rule of thumb: if the annual gross profit of a SKU is less than its annual carrying cost (storage + capital + handling), it is destroying value by existing in your catalogue. The right answer is discontinuation, not continued management.
ABC analysis is one of the highest-leverage tools in inventory management because it makes the Pareto distribution of your revenue explicit and actionable. The differentiation that follows — more safety stock for A items, more aggressive dead stock policy for C items, more relationship investment in suppliers of A products — is where the real return is.
Run it quarterly. Act on it. Review the C-class candidates for discontinuation at each cycle. The stores that do this well carry less inventory, have fewer stockouts, and free up more working capital than those that treat every SKU identically.
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