ABC Analysis: Categorize and Optimize Inventory (2026)

ABC analysis is an inventory categorization method that helps you identify your best products, optimize your inventory investments, and increase profitability. It ranks products by their share of revenue and groups them into three tiers: A, B, and C.

US retailers are sitting on about $1.36 in inventory for every dollar of sales. That’s a lot of tied-up expenses—and investing in the wrong products risks dead stock. An ABC analysis gives store owners a systematic way to see which products are worth the investment and which aren’t.

This guide covers how to calculate an ABC analysis, how to act on the results for different tiers of inventory, and its benefits and shortcomings as part of your inventory management strategy.

What is an ABC analysis in inventory management?

An ABC analysis is an inventory categorization technique that helps store owners find their most and least valuable products. It gives you greater inventory control and profitability by helping you identify the products that make (and cost) your business the most money. 

The Pareto principle, or the 80/20 rule, drives ABC classification. It groups inventory into three categories based on total revenue:

• A grade. These items have the highest annual consumption value and customer demand. This category includes a small percentage of total inventory that generates 80% of revenue.
• B grade. This middle-of-the-road inventory generates the next 15% of revenue. These items can fluctuate between A and C grades.
• C grade. This inventory generates the remaining 5% of revenue, also known as slow-moving or dead stock. These items are overstocked, which leads to higher holding costs. 

Note that these percentage thresholds are widely used guidelines, but aren’t a fixed rule.

The importance of ABC analysis

Inventory optimization balances product availability with holding costs. Without it, it’s difficult to predict which products to purchase to meet future demand without stockpiling excess items. And selling out of in-demand products could mean disappointing customers and missing future sales.

Storage fees increase annually, so it’s important to make the most of warehouse space. Holding costs for warehousing, insurance, and labor reduce profit margins. Expired perishable products lose all value, even at discounted rates.

The financial stakes are real: In a survey of 500 established Shopify merchants,* 43% of home and garden businesses reported struggling with cash flow management in their first year—the highest rate across all verticals surveyed—driven in part by bulky inventory and high storage costs. Merchants who reviewed their finances frequently were less likely to face inventory and cash flow challenges, underscoring the value of systematic inventory analysis

Regularly analyze inventory reports to ensure long-term success. ABC analysis is an inventory management method that can help. If you use Shopify, you can go to the reports section in your dashboard to pull an ABC analysis by product report.

The benefits of ABC analysis in inventory management

• Better inventory control
• Improved customer satisfaction
• More informed pricing decisions
• Improved sell-through rate
• Lower storage costs
• Improved resource allocation

Better inventory control

An ABC analysis helps with demand forecasting by showing your top-performing products. One strategy is to use your open-to-buy budget on those—they have the most potential to earn money for your business. Prioritizing their availability helps you avoid expensive stockouts.

You’ll also see your worst-performing products, and know not to order large quantities of them to reduce holding costs and improve inventory control. 

Improved customer satisfaction

If your store is known for a certain kind of product, customers will expect it to be in stock when they shop there. By identifying your A grade inventory, you can put processes in place to make sure you never run out of A grade stock. That reduces the chances that shoppers visit your store wanting a bestselling product but leave empty-handed.

More informed pricing decisions

An ABC analysis is a great way to uncover which products return the most revenue for your store. “It ensures you know exactly what products are on the shelves and in your warehouse,” says Jara Moser, head of marketing at Shopventory.

“By categorizing products based on their value and usage, you have greater insight into what slow-moving products you’re losing money from, so you can discount them and make room for more profitable products.” 

Improved sell-through rate

Sell-through rate (STR) is the percentage of inventory you’ve sold to customers. Fewer products in storage mean lower warehousing fees and better customer insights. 

An ABC analysis helps improve your storewide STR by identifying which products are most popular. Plan any upcoming replenishment orders against that data. Order fewer C grade products; put more of your budget into A grade inventory. You’ll have fewer unsold products left in storage.

Pro Tip: Find your STR in the Percentage of Inventory Sold report inside your Shopify back end.

Lower storage costs

Keeping too many items in storage adds up in cumulative costs. You’re both paying to keep unsold items in storage and creating an opportunity cost of wasted space. The shelves storing C grade products could be holding more of your bestsellers.

“It’s pointless to overstock your warehouse with low-margin items that are only sold sometimes. ABC analysis enables planners to determine service levels based on product classification, which enhances overall supply chain performance by reducing the amount of safety stock carried,” says Gerrid Smith, CMO of Joy Organics.

Improved resource allocation

In an ideal world, shelving capacity holds large quantities of every item. Even with a location large enough for total inventory, monthly fees would be high, so you have to work with the available space.

Better resource allocation extends to financial management overall. Among surveyed Shopify store owners* earning more than $1 million in revenue, 57% tracked profit margins and 51% tracked cash flow—compared to significantly lower rates among merchants earning less than $100,000. ABC analysis is one tool that helps merchants graduate from tracking revenue alone to understanding where their money is actually working hardest.

Once you run an ABC analysis, you’ll see which products make up your A grade inventory. Items that fall in the top 80% should get the most shelf space in your store. You can better allocate the shelving resources you have to make sure they’re not being wasted.

How to calculate ABC inventory analysis

ABC analysis formula

To run an ABC analysis, follow these steps:

1. Calculate how much revenue each individual product has generated for your store.
2. Divide that number by the total revenue generated by all products over the same period to determine the percentage of revenue.

Here’s the formula:

Percentage of total revenue = (Individual Product Revenue / Total Revenue) x 100

For example, if your store sold $50,000 of serving bowls in 28 days and the entire store generated revenue of $200,000 in that same time period, the serving bowls would account for 25% of your store’s revenue.

Repeat this process for every item in your inventory. List your products in descending order of percentage of revenue generated. Then, assign grades based on revenue share:

• A grade: The top 80%
• B grade: Those falling in the middle 15%
• C grade: Anything in the bottom 5%

If you don’t want to do the math, you can go to the reports section in your Shopify admin to pull an ABC analysis by product report.

Example of ABC analysis

Below is an ABC analysis example for a home décor brand. It categorizes SKUs into grades A, B, and C based on the percentage of total store revenue each item has generated. 

Serving bowls and serving trays are the A grade products, so keeping these products in stock is a priority. The store owner could show them on their homepage or in a top-selling products collection on their online store. If they also sell in person, show them in high-traffic areas of their store like the checkout desk for impulse buys. 

Plate sets, mug sets, and glassware sets, on the other hand, make up the C grade products. The merchant might consider no longer carrying those items, improving the products themselves, or running extra promotions. 

A grade strategies: what to do with your best inventory

Your ABC analysis shows you the A grade products that give you the best return on investment (ROI). Here are seven tactics you can apply to A grade inventory items to maximize your sales and profits. 

Create strong relationships with A grade suppliers

A grade suppliers are those you want to nurture. Strong relationships will make your supply chain and reordering process more efficient and improve communication.

Strong relationships with these suppliers can lead to better pricing, quicker turnarounds, and other preferential treatment on your A grade products.

Here are a few supplier relationship management tips to keep in mind:

1. Make sure you’re clear on what you want to order. Discrepancies can cause headaches for you and your suppliers.
2. Put your order in writing. Create and send purchase orders so everything is documented and all parties stay on the same page.
3. Pay on time. On-time payments build a good reputation for your business.
4. Get to know your supplier’s business. Learn about your supplier’s business so you can give adequate lead time and build understanding around their own limitations.
5. Connect on a personal level. A friendly personal connection can make business relationships stronger.

Identify multiple suppliers for A items

Having a positive relationship with your supplier doesn’t prohibit you from shopping around and pursuing additional options. In fact, it’s critical to establishing a resilient supply chain, which is important for category A products—especially when preventing stockouts of your high-value items.

Suppliers can run out of manufacturing capacity if they face unexpected or uncontrollable circumstances, like too many purchase orders, manufacturing maintenance mishaps, or equipment breakdowns. These challenges can increase prices, which affects your break even point and can negatively impact your profit margins. And in a worst case scenario, your supplier could go out of business or discontinue the high-demand products you need, leaving you to scramble for a replacement.

Reinforce your supply chain by identifying multiple suppliers, or at least a back-up supplier, for all your A grade products. They’ll help protect your supply chain and reduce the risk of costly stockouts.

Have A grade inventory on hand

Your A grade inventory represents your highest-performing and highly demanded products, so you should always have stock on hand.

This is where safety stock comes into play—a small surplus of inventory you keep on hand in case of a change in market demands or lead times. You can calculate safety stock in a number of ways. Market variability, supply chain reliability, and the inventory carrying cost you’re willing to hold all impact the amount of safety stock required.

Here’s the basic formula for calculating safety stock for your A grade inventory:

Safety stock = (max daily sales x max lead time in days) – (average daily sales x average lead time in days)

You can pull all these metrics directly from your Shopify admin. To determine the max daily sales volume, use the Sales over time report and the “variant” filter to determine daily sales of the unit for which you want to calculate the reorder point. From this view, you’ll be able to determine the maximum daily sales over a specific time period.

The average daily unit sales refers to the number of units you sell of a particular product over a specified period of time. To determine this, refer to the Average inventory sold per day report in Shopify.

Say you sell 1.5 units of serving bowls per day.

The average delivery lead time is the amount of time it takes to receive a shipment of stock. To get this, divide your total number of lead times by a set period of time.

You know that the longest they’ve had to wait for a purchase order was 15 days, but, on average, it takes 10 days to receive serving bowls from your supplier. Therefore, the safety stock is: (5 x 15) – (10 x 1.5) = 60 units.

Identify a reorder point for A grade stock

Once you know your optimal inventory levels for A grade stock, you can identify a reorder point for those products. This allows you to prevent stockouts and automate the purchase process.

The reorder point is a simple calculation that lets you know the lowest amount of inventory you can sustain before you need to order more to maintain the optimal stock level. You can calculate the reorder point for each individual product (or variant) that you sell.

Reorder point = (average daily unit sales x average lead time in days) + safety stock

Using the same example above, this merchant’s reorder point is: (1.5 x 10) + 60 = 75 units.

In Shopify, use the Month-end inventory snapshot to monitor your inventory quantities for A grade products. Once your product or variant quantity hits the reorder point (i.e., 75 units), you know it’s time to order more products.

Invest more in A grade inventory

Since your A grade inventory is your highest value stock, it’s a good idea to invest more in these products, especially if demand is steady and sustainable. 

In some cases, you might order higher quantities of inventory from your suppliers so you have more to sell. Or, you could increase your marketing and advertising spend on A grade products to drive more demand and sales.

Increase prices for your A grade inventory

Pricing products is a challenge in itself and many variables need to be considered. Target audience, cost of products, revenue targets, competitor pricing, seasonality, and knowing where the market is headed all play a role. 

But given that demand is highest for your most valuable inventory, you may want to consider raising prices slightly in order to increase your profit margin. Take a look at your pricing strategy for A grade products. Would shoppers be willing to pay more for their favorite items? If so, you can improve your bottom line.

Secure and control A grade inventory

A grade inventory is high performing and highly coveted. It should be treated and protected as such. Place better security and control over your A grade stock to ensure it stays safe and unspoiled so you can sell it.

Unfortunately, products get misplaced, damaged, and even stolen. To prevent this from happening to you, consider the following ideas:

• Secure this inventory with multiple locks, security guards, and other safety measures, especially if you use your own warehouse or keep your inventory at home.
• Monitor A grade stock with a security system and video surveillance. Your third-party logistic partners (3PLs) likely already have strong security precautions in place.
• Conduct cycle counts on a regular basis. This will help you detect discrepancies early.

For inventory across multiple warehouse or retail locations, you can also use electronic article surveillance (EAS), cameras, RFID tags, and merchandising security.

B grade strategies: how to manage your mid-tier inventory

B items are dependable contributors to a brand’s revenue. They provide stability without the high volume of A-tier bestsellers. In an ABC system, B items are a watch list for products that can graduate to A status or slide to C.

Monitor performance and reclassify when needed

Review B items on a fixed schedule, such as every month or buying cycle. This keeps classification current and safeguards stock. Identify which products shift between tiers to make informed reordering decisions.

Track metrics such as sell-through and velocity by variant to determine whether a product is trending up or down. Reclassify items based on these changes, margin contribution, and location-level performance.

Maintain balanced stock levels

B items shouldn’t absorb cash intended for A products. Balance these levels using lead times and demand consistency. Use tighter inventory replenishment rules than you would for C items, but avoid the deep safety stock cushions reserved for your top performers.

For multilocation brands, if a B item is lagging in one store but moving in another, use Shopify’s inventory transfers to balance the load. Moving existing stock is often more profitable than placing a fresh purchase order.

Optimize for growth potential

Some B items become A items through merchandising tweaks or better placement. Focus on products with improving sell-through and healthy margins. 

Test whether these items have demand on other surfaces by syncing inventory across social channels and marketplaces. Also, try bundling with A grade items to increase exposure. 

Automate your oversight with Shopify Flow to set up restock alerts or hide out-of-stock B items. This gives your mid-tier products enough attention without constant manual monitoring. 

C grade strategies: what to do with your worst inventory

Your C grade products are at the bottom of your sales priority list. One option is to “get rid of C” so you can limit the financial burden of keeping it on the shelf. 

However, you can use many strategies to optimize your C items, helping you reduce inventory costs and free up cash flow without ditching them altogether. 

Reduce the price or sell C grade products at a discount

While you raise prices for A grade products to maximize profitability, you want to consider lowering prices for C grade inventory items to get them off the shelves. Many shoppers, especially online shoppers, still make purchasing decisions based on the lowest price. 

It might sound counterintuitive to make even less revenue from your lowest performing items, but lower prices could make your C grade products more attractive to buyers. And, by reducing your price to be lower than your competitors’ (or even offering the product at cost), you’ll move it more quickly to reduce holding costs and save money in the long run. 

Give your C grade products to charity

Charities accept more than just monetary donations. You can also donate actual products to those in need. Look for local charities that would specifically benefit from your slower-moving inventory, such as women’s shelters or food banks. This ensures they’re going to better use than sitting in a warehouse or a landfill.

Bundle dead stock products with A grade or B grade products

Product bundles are groups of similar products offered as a package for one discounted price. Bundling complementary C items with A or B items, is a strategy used to increase the perceived value. 

As a result, demand for those C grade products can increase, you can sell them at a slightly higher price, and you get rid of your dead stock. By pairing a C grade product with a top performing product, you’re also improving the buy rate of your bundled A and B grade products.

Increase visibility for your C grade inventory

Sometimes C items land themselves at the bottom of your list because they haven’t been given much attention. Perhaps they’re the lowest-earning items because they’re at the back of your 10,000-square-foot store—a place that doesn’t get much foot traffic.

Giving your C grade products more visibility online and in your brick-and-mortar store can help drive more demand and sales.

Consider placing C grade items next to complementary A grade merchandise. You could even strategically display them in the checkout line or other highly visible and trafficked locations in your retail store, or run online marketing campaigns to promote them on your website.

Give away your C grade products as gifts

Giving C grade products away to customers as freebies gives you the chance to offload excessive inventory while also creating a discount pricing strategy. For example, for every serving bowl (A grade) you sell, give shoppers a free mug (C grade).

You can even give away your C grade products to your top customers as a way of recognizing and thanking them for their business. These tactics can lead to increased loyalty and repeat purchases.

Discontinue and stop ordering C grade inventory

When all else fails, C grade inventory is likely a candidate for discontinuation. Unless your product serves another purpose for your business, consider removing that product from your store so you can focus your investment on better performing products.

Using ABC analysis for cycle counting

Cycle counting is a physical inventory check that merchants do periodically throughout the year. Instead of a full inventory count (which would likely take hours), you can use your ABC analysis data to prioritize these cycle counts. A grade items should be counted first, followed by B and, finally, C. 

This helps maximize your time. You’ll confirm you have the right amount of inventory for your highest value products, rather than waste precious time cycle counting low-value stock. 

Shortcomings of the ABC method

While an ABC analysis is a simple way to find your best and worst performing stock, it does have its downsides. Here are some things to consider when doing an ABC inventory analysis. 

It doesn’t account for seasonality

An ABC analysis only uses data from a given time period. If your products are affected by seasonal changes, they might be incorrectly categorized and deprioritized. For example, toys may be considered C grade through the summer and fall, but rise to A or B grade during the holiday shopping season. 

ABC analysis uses standardization. It takes into account the revenue each item has generated across any given time period (usually one month).

That means you should exclude any seasonal items from your ABC analysis. This prevents you from offloading most of your inventory in the off season when it falls into C grade and having to quickly restock during the time of year they become bestsellers again. 

It doesn’t account for changing consumer behavior and trends 

Trends can impact how and what buyers shop for during a period of time. The most obvious example is movie-related costumes. 

Google searches for “Barbie costumes,” for example, skyrocketed when the live-action film launched in 2023—costume companies likely ranked it as A grade inventory at the time. 

Now, the novelty has worn off. The once A grade inventory sits on a back shelf, placed in the C grade bucket.

Because trends shift over time, it’s difficult to predict whether your A grade inventory will stay that way. Historical data isn’t always reliable for forecasting either, making ABC analysis a difficult predictor of future sales.

It doesn’t account for new product launches 

If you’re launching a new product, you won’t have historical data to predict that product’s performance. You can make your best estimates, but sometimes the only way to figure out whether a product will be in demand is to test it. A few months’ worth of data is necessary to know if it will be a top-selling product for your store. 

An inventory-wide ABC analysis doesn’t take this into consideration, potentially leading you down the wrong path and causing you to discontinue new product lines before they’ve had a chance to sell. With ABC analysis in Shopify, you can filter out new products from the report for a more reliable analysis.

Percentage of revenue is one of many important inventory metrics 

When using analytics in your business, it’s always important to consider multiple sources and data points. 

ABC analysis is just one of many reports you should consider when analyzing inventory performance. While ABC analysis is valuable for seeing which products account for the greatest percentage of store revenue, you also want to look at metrics like your inventory turnover rate, days on hand, stock-to-sales ratio, sell-through rate, rate of return, and profit margin.

Qualitative insights are valuable, too

Another shortcoming of ABC analysis is that it doesn’t account for qualitative insights that store associates may have on a product’s performance. 

“The biggest fail with ABC analysis is that nuances between stores are not taken into consideration,” says Liza Amlani, principal and founder of Retail Strategy Group and The Merchant Life.

“There needs to be a human element of walking the shop floor and talking to brand ambassadors as well as customers to gain insights on product success and failures that sitting behind a computer screen can’t tell you.

“If a product is not selling and you are able to capture feedback on fit or styling challenges, you have the ability to take action right away. Taking returns into consideration and moving inventory to another season could give you the opportunity to avoid marking down products and trigger more full-price selling.” 

It may not suit every business model

ABC analysis is most effective when inventory value follows a Pareto pattern, where a small percentage of items generates the majority of revenue. For example, a clothing retailer might find that 20% of their catalog accounts for 80% of total sales.

ABC analysis provides limited value for businesses with uniform inventory consumption. A subscription box company that ships the same five items to every customer each month won’t see clear A, B, and C tiers.

ABC inventory management best practices

Automate inventory tracking

Before retail technology solutions, store owners had to manually count inventory and record it in a spreadsheet. Now there are tools and apps that automate these processes.

With Shopify POS, store owners can count inventory quickly using a bar code scanner and Shopify’s inventory features. This can cut down the time it takes to perform an inventory count. 

Tip: If you’re looking for an alternative to external bar code scanners, Shopify POS lets you scan and count inventory using your tablet or smartphone camera instead. Store owners can also use the Shopify mobile app to scan and count inventory from their warehouse floor. Variant quantities are automatically updated in the inventory list section of Shopify.

Analyze inventory across all locations

Similarly, Shopify merchants can view inventory reports to analyze their inventory data across all locations, from one centralized dashboard. You’ll see your A, B, and C inventory across the entire business, allowing you to make better restocking decisions and maximize storage resources. Retail merchants can also access this data right from Shopify POS.

Use simple classifications

An ABC analysis works best when using simple inventory classifications, such as revenue generated by product name or category. There’s no need to break each one down by color or size unless you see a reason to dig into the details. (You can always do that later with a mini ABC inventory analysis for each item.)

Optimize your inventory with Shopify 

ABC inventory analysis is a helpful way to see which products perform best and worst so you can optimize for sales and profitability. Remember to exclude seasonal items and new product lines, and to reference other inventory metrics for the most accurate grades. 

Prioritize A grade inventory by investing heavily in it—both in terms of stock levels and the relationship with those suppliers. Get rid of C grade inventory (and cut storage costs on dead weight) by bundling it with other items, offering them at a lower cost, or donating it to people in need.

It’s easy to get started with ABC analysis by product in Shopify. It can pull historical sales data to show you your best (and worst) performing inventory within just a few clicks.

This post was originally written by Emily Manley, and has been updated by Elise Dopson. Illustration by Rachel Tunstall

*Survey Methodology: Based on a 2025 survey of 500 Shopify merchants conducted in English across Australia, Canada, the United Kingdom, Ireland, New Zealand, and the United States. Respondents were established merchants with more than two years on the platform. Results reflect the experiences of this specific sample and may not be representative of all merchants.