When you place an order with a wholesaler or distributor, they may require a minimum order quantity or MOQ which refers to the smallest volume of inventory they are willing to sell to one customer at a time.
While it seems counterintuitive to limit potential customers, suppliers implement MOQs to guarantee profitable business themselves. This is why, as an ecommerce seller, it’s crucial to understand how MOQs work, how they benefit the supplier and ways your business can take advantage of them.
If you’re interested in learning further, stick with us until the end of this article as we explore what MOQs are, how to calculate them, and tips to make the most of them.
What Is Minimum Order Quantity (MOQ)?
In supply chain terms, a minimum order quantity or MOQ is the fewest number of units a supplier requires you to purchase in a single order. It ensures that the order is large enough for them to cover their costs and turn a profit.
Consider the example of a wholesale baker implementing an MOQ of 20 cupcakes. Why? Setting up baking machinery, sourcing and prepping ingredients, and cleaning up all cost time, money and labor so selling just one cupcake wouldn’t cover those costs.
Similarly, manufacturers, wholesalers, and even some retailers use MOQs to ensure their business remains financially viable.
Types of Minimum Order Quantities
Suppliers have different costs associated with the products or materials they sell, such as machinery, manufacturing, shipment costs, billing, bookkeeping. So, depending on the circumstances, they may offer a simple or complex MOQ;
A Simple MOQ comes with a single restraint on the order limit such as a minimum quantity ordered or a minimum spend.
A good example of this is a book printing service. Because it won’t be profitable to set up presses and printing plates only to print a handful of pages or books, they likely require an MOQ that will make the print run profitable such as 100, 500, or 1000 books.
Complex MOQs, on the other hand, require multiple limits such as but not restricted to a minimum dollar value or minimum quantity of units.
Take the example of a fabric sourcing company that sells raw fabrics to clothing manufacturers. Usually, they don’t just require a minimum order of units; they could also request a minimum length of fabric purchased in certain colors, yard lengths, or fabric type. Moreover, they may request a minimum dollar value for the sum of your orders.
The Benefits of Minimum Order Quantity
MOQ implementation empowers suppliers to buy raw materials in large quantities, thereby reducing costs and saving more. Generally, if a supplier’s manufacturing process is geared towards mass production, then the extra labor costs for larger orders might be trivial.
In this scenario, some suppliers do not buy raw materials until a customer places an order. By doing this, the company is able to minimize the chances of having excess inventory that does not sell, thus lowering holding costs and improving supply chain efficiency.
The main function of MOQs is to ensure that every single batch earns a profit for the suppliers. To foster financial sustainability, suppliers may have to tailor their pricing and MOQs to suit the profit margins over time.
Reduced Inventory Expenses
Minimum order quantities can be used as an effective inventory control method, reducing the need for warehouse space and lowering total inventory costs. This ensures orders are only produced when there is a profitable demand.
For E-commerce Brands:
Cost-Savings on Bulk Purchases
When using suppliers with MOQs, buyers benefit from economies of scale by getting the best price per unit, as many companies offer discounts on bulk purchasing. This can be economically sensible, especially in relation to demand and shelf life.
It ensures that merchants have an opportunity to get the cheapest price per unit.
Strengthened Business Relationships
While discussing MOQs with your supplier might be a difficult thing, it is crucial for establishing good partnership terms.
If you can sell your vision and business plan to a reliable supplier, you’re able to get them in on your plan to grow your business and they’ll be happy as long as they keep making money as your business expands.
How to Calculate Minimum Order Quantity
If you’re a supplier and ecommerce seller who offers wholesale orders to other retailers, understand that there’s no one formula for calculating your MOQ just as there’s no one right MOQ amount. Instead, use the steps below as a starting point.
Good demand forecasting takes into account variables like product type, competition, and seasonality to suggest near estimates of units to be sold that can be sold in a given time frame.
For retail sellers, your goal is to ensure forecasted sales align with the supplier’s MOQ.
For example, if the forecasted sales of the product are at 1200 units, and the set MOQ from a supplier is 1300 units per order, the difference is manageable so you can the supplier can make it work, especially if the products are small like perfumes or bags, as they can be stored and sold off easily.
However, if the products the supplier’s MOQ has a large disparity with your forecasted demand, for example, you forecast to sell 250 items but the MOQ is 800, you will have to negotiate or find a different supplier.
Calculate Your Break-even Point
Both sellers and suppliers looking to set MOQs must know their break-even point. This term refers to the price per unit that will result in no profit and no loss.
Knowing the break-even point is essential because the goal of MOQs is to set a price per unit that results in profit. As an example, if it costs a supplier $1 to manufacture a product, the break-even point will be $1.
Calculate Storage and Holding Costs
Certain products are more expensive to store than others, so depending on the products in question and the storage requirements, the costs to store a product and the MOQ price will vary.
For example, oddly shaped items may take extra space, and perishables that need to be kept in cold storage will demand more energy costs. Still, regardless of the variations, as a B2B supplier you may want to wait until a customer makes a purchase before buying and storing raw materials and finished products.
And likewise, as a seller, you will want to think carefully about purchasing high MOQs if there’s little to no signals of materializing demand.
Calculate the MOQ
After gathering all the information we’ve discussed, it’s time to decide on an MOQ.
As an example, let’s imagine your brand:
- Forecasts to sell 300 units in the next quarter
- Calculates a break-even point of $3 per unit
- And pays $2 per square foot to store 1 unit of said product
With these details, we can calculate;
(the break even point + your storage costs) X your forecasated sales. Or (3 + 2) X 300 which equals 5 X 300 and which equals $1500.
So to cover this cost and gain profit, you need to sell each product for more than $5 which brings in exactly $1500.
That said, how high you set the price per unit will impact how high or low you need to set your MOQ. For example, you could charge $8 per unit.
At this price, you’ll need to sell at least 188 units to make any profit at all, specifically $1504. Any less, and you will have lost money. On the other hand, setting an MOQ higher than 188 will increase your profit.
Alternatively, you could charge $10 per unit. Now, because the price per unit is higher, you won’t have to sell as many units to make a profit, so you can reduce your MOQ.
In this case, you will have to sell just 151 units to turn a profit, so setting an MOQ higher than 151 will make you more money from the sale.
Tips For Retail Sellers To Make the Most of Minimum Order Quantities
As a retail seller, if you’re required to purchase a certain number of goods and meet a supplier’s MOQ, you want to at least make sure you’re getting the best deal, your stock is fast-moving, and customers are incentivized to buy from your store. Below, we’ll explore some tips for achieving these;
Incentivize a Higher Spend for Customers
For end consumers, encourage higher spending and average order values with incentives like reducing the overall price per item for items bought in multiples. Think of this as a way to burn through inventory faster by getting customers to buy more than one unit of a single SKU.
On the other hand, if you’re selling to other retailers, implement an MOQ per tier system wherein the price per unit gradually reduces as the number of units multiplies. For example, if you’re selling luxury-fabric biker hats and the cost is $10 per unit, you might offer a tier of 20 biker hats at $8, 40 hats at $6, and so on.
Offer Free Shipping Thresholds
Another way to increase the rate of purchase for units of an SKU is to offer free shipping on the condition that the buyer purchases a certain amount.
Usually, you would advertise this deal as “spend X amount to get free shipping,” (meaning the incentive is tied to a minimum dollar spend). That works fine, but if you want to increase purchases of specific products, you might also advertise “buy X amount of a certain product” and get shipping free.
Don’t Overstock Slow-Moving SKUs
As we explained earlier, ordering too many units of a product can drain money out of your business thanks to storage fees. This is why no matter what you’re selling, a widely recommended strategy is to keep a close eye on your best-selling products, then restock them more often and in higher quantities. Whereas, for items that sit in storage longer, keep a minimal amount of stock on hand until you have a good reason to forecast a surge in demand.
Negotiate with Suppliers to Reduce MOQs
If your supplier MOQ is higher than you can afford to stay profitable, attempt to negotiate with them. This is because suppliers and businesspeople in general are always expecting some sort of negotiations, so there’s no harm in asking to shave off whatever amount you can from the quote price, be it a single cent or 10 cents. And, hey, in the worst-case scenario, they will say no.
Additionally, think outside the box about your negotiations. For example, ask the supplier if they will allow you to purchase units of multiple SKUs to meet the MOQ instead of a single SKU or if they have any leftover items from canceled orders which don’t require them to produce from scratch.
Find Other Suppliers or Distributors
Again, if your supplier MOQ is higher than you can afford to stay profitable, consider working with distributors or trading companies, especially if you’ve been negotiating with a manufacturer.
What these services do is that they buy in bulk from manufacturers and sell smaller quantities. Moreover, their target market are businesses in need of low MOQs and small mom and pop stores in general.
Over to you!
For businesses selling to consumers, now that you understand how MOQs work, how to calculate them, and how to take advantage of them, you’re ready to evaluate suppliers and negotiate sourcing prices.
And for B2B businesses looking to set up MOQs for wholesale trading to other companies, remember the for calculating MOQs that we talked about, how to calculate your break-even point and how to calculate the minimum viable price you must sell at to generate profit.