ABC/XYZ analysis of your product range

ABC/XYZ analysis sorts products by two traits: how important they are to the business (ABC, by revenue or profit) and how stable the demand for them is (XYZ). The result is nine groups, each needing its own purchasing and stock rules.

ABC: what matters

ABC analysis is an inventory classification method from materials management. Products are split into classes A, B and C by how important they are: class A gets the closest control, B moderate, C the simplest. There are no firm boundaries between classes: the shares depend on the company's goals (Wikipedia). In the Wikipedia examples:

• A: about 20% of items give 70% of consumption value, B: 30% of items give 25%, C: 50% of items give 5%;
• or A: 10% of items give 66.6%, B: 20% give 23.3%, C: 70% give 10.1% (Wikipedia).

The popular "80/15/5" is just one option. For a store, take revenue or margin for the last 6–12 months.

XYZ: how stable demand is

XYZ measures the coefficient of variation (CV): the standard deviation of sales divided by average sales for the period. Common thresholds according to Mecalux: X — CV up to 10%, Y — from 10% to 25%, Z — above 25%; Mecalux itself notes that companies adjust the thresholds to suit themselves (Mecalux). So the same product can land in different classes depending on the boundaries you pick.

For a store with seasonal demand, thresholds of 10% and 25% may push almost everything into Z. Choose boundaries that fit your range and keep them unchanged between calculations.

The 3×3 matrix

The combination gives nine cells, from AX (important, stable) to CZ (low-value, unstable). Mecalux calls AX an example of the best combination and CZ a less profitable one (Mecalux). The source gives no rules for each cell; what follows is our practical logic, not a quotation.

Example (illustrative figures)

A store has 400 products. Over a year the 60 best sellers (15%) bring 70% of revenue (class A), 100 products bring 25% (B), 240 bring 5% (C). The "electric kettle" sells almost the same every month (CV 8%): that is AX, and it must never go out of stock. A gift set sells mostly in December (CV 60%): that is AZ, and it should be bought for the season, not by the average. Conclusion: in our example, money is tied up mainly in C products, and they can be sold off.

Common mistakes

• Counting by quantity only, not by revenue or margin.
• Taking too short a period for XYZ: 2–3 months won't show seasonality.
• Ignoring stockouts: in periods of "zero in the warehouse" there are no sales, and not because of demand.
• Doing the analysis once. Demand and range change, so recalculate every quarter.
• Removing new products from C when there are simply no sales yet.

FAQ

What is ABC analysis in simple terms? Splitting products into three groups by contribution to revenue or profit: a few of the most important (A), medium ones (B) and many minor ones (C).

What does XYZ mean in the analysis? Demand stability classes: X — stable, Y — fluctuating, Z — unpredictable.

How do you calculate the coefficient of variation? Divide the standard deviation of sales across periods by the average sales volume per period (Mecalux).

What thresholds should I use for X, Y, Z? 10% and 25% are common, but they are conventional. Adjust them to your own seasonality.

Related terms

• Merchandising in an online store
• Unit economics of an online store
• Как найти свои золотые метрики: Руководство по KPI для интернет-магазинов

Sources

• Wikipedia. ABC analysis — en.wikipedia.org/wiki/ABC_analysis
• Mecalux. ABC-XYZ analysis — mecalux.com/blog/abc-xyz