When you carry a lot of SKUs, capital is always limited but attention is even more limited. Spreading inventory budget evenly across your whole catalog means your best-selling items run dry while dead weight fills the warehouse. ABC classification is a way to look directly at your catalog and decide which SKUs deserve priority capital, and which ones to trim.
What ABC classification is and why it works
ABC splits your catalog into three groups based on revenue contribution, not unit count or the number of shipments you have placed. The logic comes from the 80/20 principle: in most shops, around 20 percent of SKUs generate 80 percent of revenue.
- Group A: roughly 10 to 20 percent of your SKUs, producing 70 to 80 percent of total revenue. This group keeps the shop running.
- Group B: around 30 percent of SKUs, contributing 15 to 20 percent of revenue. The middle tier: these can move up to A or slide down to C.
- Group C: the remainder, often 50 to 60 percent of SKUs, contributing only 5 to 10 percent of revenue. This group consumes the most capital relative to what it returns.
This is not a one-time exercise. Your catalog shifts with seasons, trends, and competition. Review it monthly or at a minimum every quarter.
How to run the classification
No special software is needed. A simple spreadsheet works if you can pull sales data from your platforms.
Step 1: Pull revenue per SKU for a fixed period. Use a consistent window, such as the last 30 or 90 days. Use revenue (units sold multiplied by selling price), not raw unit count. A SKU moving 500 units at 30,000 VND contributes very differently from one moving 50 units at 500,000 VND.
Step 2: Sort descending and calculate share. Rank every SKU from highest to lowest revenue. Calculate each one's percentage of the total, then cumulate down the list. The SKUs that together reach 70 to 80 percent are Group A. The next band up to around 95 percent is Group B. The rest is Group C.
Step 3: Label and save. This takes 30 to 60 minutes the first time, then much less after that because you are only refreshing the numbers into an existing structure.
A simple example: you have 20 SKUs, total revenue last month was 50 million VND. After sorting, your top 4 SKUs account for 38 million (76 percent), those are Group A. The next 6 SKUs add 9 million (18 percent), those are Group B. The bottom 10 contribute just 3 million (6 percent), those are Group C.
Group A: load up capital, do not let these stock out
Group A is where your capital must work hardest. If a Group A SKU goes out of stock, you lose the immediate revenue and risk a listing ranking drop on the platform because fulfillment rate falls.
A few things worth keeping in mind for Group A:
- Higher safety stock. Because Group A items sell fast and lead times from 1688 are long (roughly 18 to 30 days by sea freight, or 7 to 14 days by road), you need a bigger buffer than for Groups B and C. Set your reorder point using actual sell velocity and the full time from placing the order to having stock ready to ship.
- First claim on the import budget. If you can only fund part of your catalog this month, Group A must be covered first. Groups B and C come after.
- Tighter monitoring. A small shift in Group A, such as a sudden slowdown in sell-through or a supplier running late, has larger consequences, so catch it earlier.
Group B: watch and decide
Group B sits in the middle. Not the top priority, but not yet worth cutting. The useful question here is whether each Group B SKU is trending up or trending down.
A Group B SKU on the way up. If revenue has been rising week over week, this SKU may enter Group A within a few months. Worth investing a bit more attention: test a small ad spend increase, improve the listing, check supplier lead time reliability. This is a SKU worth nurturing.
A Group B SKU going flat or down. Three months of flat or declining revenue suggests it is drifting toward Group C. No need to cut immediately, but do not push more capital into it either. Sell through the current stock, then reassess before reordering.
Group C: do not let capital sit here
Group C is where capital gets buried most quietly. Many shops hold dozens of Group C SKUs because "we already ordered them," "maybe they will sell eventually," or "the loss from clearing them feels too painful." The result is a meaningful amount of capital sitting in the warehouse month after month.
For each Group C SKU, look at it directly:
- How many months of stock do you carry at the current sell rate? If a SKU has 6 months of stock at current velocity, that is 6 months your capital is not available for Group A. That is dead capital.
- Does the holding cost exceed the cost of clearing? Warehouse space has a cost, and so does tied-up working capital. Selling at break-even or a small loss is sometimes better than holding for 6 months with no return.
- Is there a structural problem? Margin too thin, supplier unreliable, market already saturated. If yes, do not reorder even if you managed to clear the last batch through a promotion. Clearing on a discount is not the same as the SKU having a future.
Not every Group C SKU has to go immediately. Some slow movers with good margin and low capital requirements are fine to keep. The point is to make a conscious decision about each one, not to let them drift.
Keep capital flowing toward winners
The biggest benefit of ABC classification is not knowing which SKUs are winning. You can feel that after a few months of selling. The real benefit is having a mechanism that forces intentional capital allocation instead of importing on autopilot.
The healthy cycle looks like this: update the classification each month or quarter, set high safety stock for Group A, watch Group B closely for SKUs on the rise, and actively clear Group C so capital is not stuck. Capital freed from Group C becomes the import budget for Group A or for testing promising new products.
One important nuance: ABC on revenue is a starting point, not the final answer. A Group A SKU can move a lot of units but carry thin margin because of platform fees or a high return rate. If you already track real per-SKU profit after fees and ad spend, use profit instead of revenue to classify. That will direct capital more precisely. Revenue is the right starting point when you do not yet have the more detailed numbers.
Bottom line
ABC classification does not solve product selection. What it solves is capital allocation: you know which SKUs deserve high safety stock, which ones to watch before deciding whether to reorder, and which ones are consuming capital without paying it back. For any shop running a meaningful number of SKUs, this is a simple tool with real practical impact: it stops capital from sitting idle where it earns nothing, and keeps stock healthy where sales are actually happening.