Everything You Need to Know About Minimum Order Quantity
If you have an e-commerce business that’s considering adding another revenue stream with wholesale, you suddenly face the prospect of setting a profitable minimum order quantity for your goods. Whether you manufacture your products with raw materials or buy finished goods straight from a manufacturer, you’ve likely encountered an MOQ as a buyer. Maybe you’ve had to eliminate specific suppliers from consideration due to their high MOQ or have sought suppliers specifically because of their reasonable MOQ.
When you’re considering wholesale, you must think about MOQs from the opposite side of the equation. From your experience buying wholesale, you might already realize how vital striking the right balance is. Too high, and you’ll bar some customers. Too low, and you’ll risk your profitability. Let’s talk more about setting MOQs for your growing business.
MOQ Meaning: What Is MOQ?
First, let’s define the term MOQ and what it means for your business.
Minimum order quantity, or MOQ, is the smallest amount of product a wholesaler will allow their customers to purchase. The wholesale business typically has reduced margins compared to a consumer-facing retailer or reseller. On average, wholesalers can expect a 15% to 20% margin. That’s because the company buying wholesale needs to buy at a low cost to turn a profit when selling the goods individually. Thus, wholesalers usually set a low price per unit and make up for this by requiring customers to purchase many products at once.
In other words, to sell goods at a price resellers are willing to pay, you must deal in large amounts of stock. MOQs are often necessary because, at wholesale pricing, the economy of scale determines your profitability.
For example, let’s say you make $1 in profit for an item you sell for $10 apiece — which is a low 10% profit margin. Making $1 per sale is not very sustainable. However, at a minimum order quantity of 200 units, the business could expect $200 per sale, making the lower profit margin more sustainable. In general, the minimum order quantity is high enough to cover the fixed costs of production and probably at least a small profit for the wholesaler.
Minimum order quantities help you maintain your profit margins and also help you achieve a predictable cash flow. With minimum order quantities, you won’t be tying up cash in thousands of units only to have a customer order in small amounts at a time. You may see MOQs expressed as a minimum number of units, such as 250 T-shirts or 100 wireless keyboards.
Another way to express a minimum order quantity is in a smaller purchase, such as $300 or $100. This method of setting a minimum order quantity may allow a customer to purchase less, as long as they are buying many stock-keeping units from your business. You guarantee a certain amount of cash flow on any order, and the customer gains more flexibility to order the number of units they need. You might also hear an MOQ called the “minimum order value” or MOV when expressed as a dollar amount.
Types of MOQs
Besides the fact that MOQs can be either a number of units or a minimum spend, MOQs do not break down into clearly defined categories or types. MOQs sit somewhere along the spectrum between high and low. Whether a particular MOQ is high or low can be subjective. A 1,200-unit minimum might be very high for a small business and low for a Fortune 500 retailer.
While what qualifies as a high or low MOQ is up for debate, here’s a rough breakdown.
- High MOQs: A high MOQ manufacturer or wholesaler might set a minimum order of 2,000 to 5,000 units. These companies typically serve some of the largest retailers in the country, who may be stocking warehouses or stores across the country with hundreds of units per location. Typical orders may be in the tens of thousands.
- Standard MOQs: A mid-sized producer or wholesaler might have an MOQ in the 500-1,000 unit range.
- Low MOQs: Smaller factories and wholesalers may set MOQs as low as 250 units, and typically target customers for sales upward of 350 units. Because the MOQs are smaller, the cost per unit is usually higher.
- Very low MOQs: Any MOQ under 250 units may be very low depending on the product and industry. These wholesalers are usually startups and typically serve e-commerce startups themselves. They may even sell a low number of units at a loss to make a name for themselves with a new customer.
Sliding-Scale Pricing for Order Quantities
Many businesses that offer lower minimums set their price per unit based on the purchase quantity. You might be willing to accept an order as low as 50 units for a higher unit cost than a customer placing an order for 500 units. These purchases may still list a minimum quantity, or you might allow a customer to buy a single unit at retail price. If you’re an e-commerce business thinking of expanding into wholesale, this may be a great pricing model to consider.
There are two approaches to this method.
- Tiered pricing: If you use this method, you’ll place pricing into buckets, where the first items purchased cost more than the last items purchased. For example, the first 25 units might cost $12 each for any customer. If a customer orders a quantity between 26 and 50 products, the first 25 will still cost $12, and anything above 25 might cost $10 instead. For 50+ units, the highest tier, you might only charge $8. A customer has to “fill” each bucket before receiving the pricing discounts available at higher levels.
- Volume pricing: Under this pricing model, you’ll charge a uniform rate that changes depending on the order quantity. You could charge a rate of $12 per unit for orders of 25 or less. For orders between 26 and 50 units, you might charge a flat $11 per unit. At the highest volume of 50+, you may charge only $9 per unit.
Both these strategies allow your customers to order in smaller minimums when they want while still encouraging the higher quantities you might otherwise need to achieve by setting a higher MOQ. While you can earn larger orders through volume discounts, it’s crucial to account for the Bullwhip Effect to avoid supply chain issues down the road.
What Are the Benefits of MOQs?
Most wholesalers set some sort of MOQ. While some wholesalers find success catering to small businesses with no MOQ, higher minimums allow you to charge the low prices wholesale has a reputation for. The advantages of MOQs include the following abilities.
- Retain profitability: Wholesalers must deal in large quantities to break even or turn a profit at such a low cost. By setting a minimum, you can guarantee all your customers will be profitable.
- Boost turnover: As a wholesaler, you must have massive inventory quantities to fulfill bulk orders for so many customers, whether raw materials or finished products. An MOQ helps you achieve good turnover, and your large amounts of stock do not expire or lose value in your possession.
- Run on a made-to-order business model: Some wholesalers produce custom products or operate on a build-to-order model. They do not keep finished goods in storage, but manufacture them in the exact amounts needed. It saves considerably on warehousing costs. However, for this strategy to be profitable, every production run must yield a large product quantity to cover the manufacturing overhead.
How Do MOQs Affect Customers?
Customers gain several benefits from buying wholesale. The main advantage is that by buying in large quantities, they can buy products more affordably, mark up the cost and sell the units individually or in small quantities to turn a profit. MOQs and bargain hunters can often go hand in hand. A business looking for a good deal can order in larger amounts to access a lower unit price.
Buying in bulk can also save on shipping costs by not having to restock as frequently. The large quantities available from wholesalers provide an easy avenue to scale. Businesses can place a relatively small order when starting and increase their order size as they earn more customers and grow their demand. Most wholesalers are happy to accommodate larger or more frequent orders from growing sellers.
Still, an MOQ can be a drawback for many customers. Unless your clients are large retailers ordering far above the minimums, the minimum you set may be a significant deciding factor in choosing your business versus a competitor. Some of the ways a minimum order may affect your customers include the following.
- Strained cash flow: Having to meet a high minimum may be challenging for some customers. While it saves money to buy in bulk, larger quantities require more cash upfront. The customer must have a lot of liquid assets to meet a high minimum. On the other side of the equation, purchasing large amounts means tying up more cash in inventory that will take longer to turn over.
- Overstocking: Many customers calculate and maintain a precise inventory level to meet demand. If that stock level is below your minimum order quantity, the customer risks overstocking. They may get stuck with inventory they cannot unload quickly. Overstocked goods can depreciate, which may soon negate the cost savings from buying in bulk.
- Increased storage costs: Purchasing in larger volumes requires a correspondingly roomier warehouse, which is more expensive to heat, air condition, light, staff, purchase or rent. Thus, high MOQs can contribute significantly to a customer’s overhead costs.
Because of these factors, it’s essential to be fair when setting minimums. You can only be profitable if your customers are. However, as long as you have willing customers who can afford your MOQ, you can make it as high as you like.
Many wholesalers find it best to be negotiable when dealing with new clients, especially smaller businesses with growth potential. If you can land a loyal customer even if their orders are lower, you can earn their more profitable orders as they grow.
How to Calculate Minimum Order Quantity
There’s no one formula for setting MOQs, as many wholesalers can find their niche by targeting customers willing to pay the per-unit price in the quantities they prefer. Smaller wholesalers may set a lower MOQ and charge a higher per-unit cost, which appeals to e-commerce startups. Larger wholesalers may require high MOQs at an attractive unit price. This model may exclude smaller customers while attracting some larger retailers and online sellers.
While there’s no set formula to calculate MOQs, you can follow these steps.
- Forecast demand: Understanding your yearly demand also takes some consideration. You must factor in your annual sales while also accounting for seasonality and your expected growth. Finally, you must also factor in your average supplier lead times and any other factors that might influence customer orders.
- Identify holding costs: Your carrying costs are what you pay to store goods in your facility. They account for everything from property rental costs to lighting, refrigeration and warehouse staffing. Alternatively, in a made-to-order manufacturing setup, you might calculate the cost of holding raw materials and the fixed costs associated with setting up a production run. Express your holding costs as a percentage of your inventory value.
- Find your break-even point: Next, determine how many items you must sell to break even when you factor in the cost of inventory and the carrying costs. Consider the revenue brought in for an order of five units versus 100 units and so on. At what point does the transaction cover the value of the inventory plus their holding costs?
- Reconcile these figures: Once you understand your break-even point, you know the rock-bottom minimum you must meet to avoid selling at a loss. However, you might also factor in your seasonality. Will customers be willing to order at that quantity year-round? How can you encourage customers to meet or exceed your minimums? You may need to target different customers or raise your unit price to be more profitable on a smaller order quantity.
How to Implement Minimum Order Quantity
Setting MOQs is a careful balancing act, allowing you to ensure every sale is profitable without deterring smaller customers who would be worthwhile. Thus, it’s often helpful to conduct an ABC analysis on your product portfolio. On your A products, which are most profitable and likely produce the most sales overall, you might afford to set lower minimums. However, on B and C category items, you might need to retain a high MOQ to maintain profitability.
Once you’ve determined which products need high MOQs and which can accommodate lower MOQs, the next step is implementing a policy that customers will accept. This strategy may involve allowing smaller “trial-run” orders for first-time customers. Or, it might mean regularly taking smaller orders for specific products because a particular customer routinely orders higher quantities of another product. Therefore, allowing a smaller order quantity, even if it’s at a loss, drives another more profitable transaction.
A final step to MOQ implementation is incentivizing the minimum order quantity. While you can incentivize a larger order in several ways, one strategy involves asking customers to double their orders and split them into two shipments.
For example, say you have a minimum of 500 and a customer who wants to order 400. You might negotiate with the customer to pay in advance for their next replenishment order. In other words, you’d sell them 800 units in one sale and ship 400 right now and the additional 400 at a later date, incentivizing the larger order with free shipping.
How to Maximize MOQ Advantages
Setting a minimum order quantity has many advantages — primarily, ensuring consistent profitability and eliminating unprofitable transactions. However, finding many ways to enhance your profitability is crucial. If you can eliminate cost centers, you can require lower minimums and therefore attract more profitable customers.
Provide Flexibility Through a Minimum Spend
As an alternative to a minimum number of units, or perhaps as a special agreement with specific customers, consider charging a minimum spend. This approach may allow some customers to mix and match smaller quantities at a wholesale price of items they do not need to order in bulk. In exchange for a higher guaranteed spend, you might also offer a lower unit price even if the customer doesn’t meet that pricing tier or volume discount.
Eliminate Unprofitable Products
In general, getting rid of slow-moving SKUs makes your business more profitable by reducing your overall holding costs per sale. That’s another good reason to conduct an ABC analysis. Managing fewer SKUs requires less overhead and reduces the amount of time and resources you dedicate to less profitable items.
However, this tip comes with a crucial caveat. Some of your slower-moving merchandise is a value-add for some of your most profitable customers, so evaluate each slow-moving product individually.
Increase Inventory Turnover
Finally, when inventory moves quickly, you’re less likely to face overstocks and higher storage costs per unit sold. Increasing inventory turnover can lower your operating costs and increase profits. You may need to run promotions to move products faster during slow periods and find other ways of attracting new customers overall. If your turnover rate is too slow, you may need to lower your minimum order quantity to help move products.
Schedule a Finale Inventory Demo
Finale Inventory has many tools to help you manage your inventory more effectively. Our flexible order management feature lets you simultaneously manage wholesale and retail customers and charge different prices based on the quantity you are selling. We have a module for managing inventory for light manufacturing and assembly and other features to make managing e-commerce inventory feel effortless.
Schedule a Finale Inventory demo to discover how our inventory management system can change the way you do business.