ABC Analysis

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It is a business rule of thumb to make 80 percent of your revenues from 20 percent of your transactions. The first step in achieving this can be to perform an ABC analysis, which groups transactions into three categories. Category A includes a small number of transactions which contribute a large part of the revenue. Category C includes a large number of transactions which result in a small revenue. Category B includes the rest of the transactions. Application of this method is not limited to transactions and revenues, of course: costs or other measures of competitive advantage offer other criteria of categorization.

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The meshed graph in the middle shows how much each transaction contributes to revenues. The arc segment compares the percentages of transactions and revenues for the three categories. Random data are obtained from a Pareto distribution.

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Contributed by: Michael Schreiber (March 2011)
Additional Contributions by: Jason Cawley
Open content licensed under CC BY-NC-SA


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