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Sometimes, wholesalers and manufacturers may require a minimum order amount (MOQ) to place an order. Producers, suppliers, or distributors might reject clients who cannot identify the minimum order volume.
Even though it seems contradictory that refusing orders might increase earnings, understanding how minimum order quantities work and why some suppliers may employ them is critical, especially for highly customized or low-margin industries. Minimizing order amounts can improve your bottom line if they’re used well.
Chapter 1: What is the Minimum Order Quantity (MOQ)
A minimum order amount (MOQ) may be required when placing an order with manufacturers or wholesalers. Manufacturers, suppliers, or wholesalers may ask for a minimum order amount (MOQ). The customer will be turned away if they don’t meet that requirement.
Although it might seem counterintuitive for businesses to turn away, higher profits can be achieved by understanding how minimum order quantities work and why some suppliers may choose to use them, especially in high-margin, highly customized businesses. You can improve your bottom line by ensuring minimum order quantities are managed carefully.
Minimum order quantity (MOQ) is the minimum number of units a company wants to sell to customers simultaneously. Although a manufacturer/supplier usually uses it in a production run or a merchant context, minimum order quantity can also be used for different orders.
A couple of examples:
- An MOQ for a supplier can be 1000 units. That means you can purchase no less than 1,000 units of inventory at one time.
- The MOQ requirement of a brand for wholesale or retail partnerships may be similar. They might require at least 50 units, or $500 worth, of product to purchase together.
MOQs are an indication of the economic constraints faced by suppliers when processing orders. These include costs for materials, machinery, and shipping costs. They can also be administrative, like bookkeeping or billing.
Simple MOQs refer to MOQs having one lower limit. It can be a dollar amount or a number, also known as “reaches.” Complex MOQs are defined as those with multiple limitations. They may contain minimal parts or materials, dollar amounts, and finished goods.
a) Simple MoQ
Many companies, even not retailers, deal with minimum MOQs. This means that there is only one restriction on orders. A lower-end limit might be a minimum spend or number of orders. For example, a book printer will have to place a minimum quantity. It wouldn’t make sense for most printers to set up their presses, make the printing plates, and then do a complete print run for just a few books. They will probably need a minimum order that makes the print run profitable.
b) Complex MoQ
Complex MOQs can have multiple requirements rather than dealing with one. A clothing manufacturer might be an example. When ordering products, it is not about a minimum number of products.
There may be other requirements, such as a minimum length of fabric for each color or type of material used, a minimum quantity of pieces or units, and a minimum price. All of these requirements must be met for buyers to place orders. The process of setting up complex MOQs is not easy. Suppliers must be able to determine the exact cost of each component, as well as labor and administrative costs.
1) Tips for optimizing MOQs
Now that you know what a minimum order number is and how to calculate them, it’s time to start. Let’s get on to the good bits. Here are some tips to help you use your MOQ to create a mutually beneficial relationship with your buyer or supplier.
a) Free shipping thresholds for customers
The free shipping threshold allows customers to receive free shipping when they spend a particular sum. A banner could be added to your website that advertises this incentive. It could read, “Spend $50 and get free shipping.” Or, you could offer to ship the first order free to first-time buyers.
Another option could be to charge shipping until a customer places a certain amount of orders and then give them free shipping for the following order. Whatever strategy you use to increase sales, free shipping can help improve inventory management.
b) Create incentives to spend more
Incentives such as lower prices when items are purchased in large quantities or product packages can be used to encourage customers to spend more. This will increase the average order value. This strategy, where the customer buys more items, reduces the per-item prices to help move inventory quicker.
If you are selling products wholesale, you have the option to set a MOQ per style, collection, or even create tiers. So, for example, ten pairs would cost $10 per pair. If you want to buy 20 pairs of jeans at $8 per pair, buy 30 pairs. The cost of 30 teams is $6. The higher the margins, the lower the retail price per pair.
c) Remove slow-moving stock
Stock storage costs will vary based on the product. It doesn’t matter what products you sell; holding stock for too long will always hurt your profits. It is essential to keep track of which products are in high demand and still in storage. It’s more straightforward and more cost-effective for you to manage fewer items.
Are you allowed to keep a specific color or variation of a product on your shelves if it is not being sold? You could run a promo to get rid. Then, in the future, you might look to buy alternative products or find a supplier with a lower MOQ. When ordering MOQs, it is essential to consider you’re breakeven and inventory turnover rates. Scalable software is the best tool to manage your inventory management system.
It’s cheaper than old-school methods but also allows you to save time and make it easier to see the opportunities and take on new challenges. This will allow you to quickly determine the amount you need to buy or sell in real time.
d) Regularly review supplier relationships
Some suppliers have higher MOQs or a lower price point than you can make a profit. If you have strong relationships with your suppliers, supplier relationship management is usually the best way to negotiate. It’s time to explore other options if that is impossible.
Never forget to negotiate the supplier price before you begin a relationship. They will set the tone and expectations for your relationship. The worst scenario is for the supplier to say no.
e) Automate with technology
ERP (enterprise resources planning) and MRP (material requirements planning) platforms are automated at their core. The analytics offered by these platforms make it easier to manage your purchase orders and keep track of supplier MOQs. The software provides real-time data; you can also quickly modify your buying patterns to meet current requirements.
It’s not always a good thing to have a minimum order quantity. They ensure your provider can continue to work for you and offer exceptional customer support. You don’t have to spend more cash if you follow these tips.
The MOQ is a critical number that providers must compute. However, it is also a key number that e-commerce vendors should consider. Nothing can stop you from working with a provider to determine their MOQ. Distributors have to earn an income to continue trading. Lowering your MOQ could be a risk to security, high-quality, or client assistance.
Chapter 2: Steps to Calculate Minimum Order Quantity (MOQ)
As a retailer, you might need to create your own MOQs for certain items. Understanding the process of calculating MOQs will give you an idea of what your purchasing requirements could change. There isn’t a universal formula for the calculation of MOQs.
Each industry and product is exactly the same. Suppliers have fluctuating prices for raw materials and components, therefore MOQs can fluctuate as well. Suppliers will gather a wealth of data to determine the moment where an MOQ earns the most money. These are the main variables that will be used in their calculation.
1) Determine Your Demand
Forecasting demand will require understanding product type, competition, and seasonal impact to forecast unit sales in the future. This data is helpful for merchants buying inventory. It can also help to plan your next purchase order. This will allow you to match supply and demand.
You can find the minimum order quantity from a manufacturer easily. It’s not difficult to determine what you’ll have to sell. The total time required to prepare inventory for shipping will need to be considered, including freight transit times, lead time, warehouse receipt with your third-party logistics service provider (3PL), and possible delays.
You may realize that some instances require inventory to be ordered quickly. To accurately estimate how many units your product will sell, Demand Forecasting allows you to consider the type of product, seasonality, competition, and other factors. This data helps determine the price of your next order. Inventory Forecasting works for hand in hand to match supply and demand in this equation.
You might find that the minimum order quantity you need from the manufacturer is similar to the amount you plan on selling through. You will also need to factor in your shipping timeline, which includes lead times, freight transit time, warehouse receiving with your third-party logistics service provider, and other possible delays.
A few tips for monitoring demand, especially during volatile times
- Maintain constant contact with your supplier.
- You must ensure sufficient safety stocks to deal with large fluctuations in the market.
- You should review your weekly sales forecasts to adjust production quantities.
- Stock up on enough to cover any sudden fluctuations in demand.
- If possible, check sales forecasts every week to adjust production quantities.
2) Calculate the Break-Even Point
It is essential to identify your break-even level if you are trying to establish minimum order quantities. This might occur on the second transaction of DTC orders.
If you have wholesale relationships, think about the lowest dollar per-unit amount you will accept in exchange for a higher value order. It should not be so intense that it reduces your profit margins. Volume discounts are possible if you aren’t just buying smaller quantities at a lower price.
It is essential to know your break-even points for you to establish your minimum order amount. After you make the DTC order, the figure will appear. Usually, this happens right after you recover customer acquisition expenses and when your customer comes back via email marketing efforts.
Consider wholesale pricing. You’re willing to pay this minimum price in exchange for a higher order. If you are unwilling to pay more for smaller quantities, the value is too low to make your profit margins negligible. However, volume discounts are acceptable.
3) Understanding Your Holding Costs
Different products may have higher storage costs depending on their size, storage length, and special requirements. It can help you save money by ensuring that these items do not remain in inventory for too many years. Inventory holding cost refers to the actual price for storing all your products. It is something to think about before investing heavily in inventory.
Some products can be more expensive to store than other items due to their size and storage requirements. It is financially wise to ensure these items are not kept in stock for too long. Your inventory keeping cost represents the actual cost to store all your products. You should be aware of this before you invest too heavily in inventory.
4) Coming Up With Your MOQ
Consider the following scenario. Let’s assume you have high demand and can consistently sell them. To make profits, you need to sell a minimum of 150 units. But your partners buy about 200 units on average.
If you are willing to sell 200 units or more, your minimum order amount could be set at 200 units. Let’s imagine that you have high demand. To make it profitable, your partners will order an average of 200 units. You must then sell at most 150 units.
Chapter 3: How to Transition To MOQs?
If your customers or partners are willing to buy 200-unit orders in the past, then you could set 200 units for minimum orders or even 150.
1) Identify your MOQ needs
Most likely, the MOQs of suppliers will show how quality they are. Consider that you will sell the products to your clients when looking at potential suppliers. Your business is directly affected by the quality of these products. These are the expectations that your customers will have. Incorporating a minimum order amount into your business’s operations will dramatically alter your financial situation, your shipping costs as well as sales figures, negotiations communications, and profits.
So, whether you’re a retailer or wholesaler, you must establish a minimum order amount formula to ensure stability within your company. For instance, if you have a regular customer purchasing 20 of this same product each month, you should try to convince him to pay the exact quantity all at one time. By doing this, you can put your orders in the books and help keep your cash flow stable.
By keeping your MOQs in good shape and you will be able to manage better at making managing your warehouse more efficiently. Imagine that you sell smaller quantities of goods often. If this is the case you’ll end up having more staff time and higher shipping expenses. If you are able to sell a greater number of merchandise in a single transaction, you can cut the advertising for shipping and the cost of packing to a great extent. You’ll be able to enjoy the savings.
2) Supplier history and customer service
Do you have a track record of delivering orders on time and error-free fashion? Is your business impacted by delays or other mistakes? Look online for reviews and do some community research.
A supplier’s customer service staff indicates the care they put into their products and how important it is to maintain good business relationships. Do they have a lot in customer turnover or a strong history of working alongside businesses?
Do not be afraid to ask questions of potential suppliers when researching them. If they are unable or unwilling to answer questions, you may want to reconsider doing business with them.
3) Don’t hesitate to request a sample
If the supplier on platforms such as Alibaba or Banggood is confident about their products, they will provide you with samples. Keep in mind that you are the one investing in the products. They know they will have a long, fruitful relationship with you if you are satisfied with their quality. That’s a win-win for everyone.
Chapter 4: Why MOQ Is Important For Ecommerce Sellers?
A supplier that refuses to provide a sample might be one you should avoid. If you have a small budget to purchase inventory, your ecommerce company may need to choose carefully who you work with. Ecommerce sellers with limited funds may have a more challenging time working with suppliers that don’t have minimum order quantities.
1) Suppliers
The MOQ, or the minimum order quantity you are willing to pay for a product or service, will determine which suppliers you can do business with. This is why MOQ should be considered an essential part of your product research. You could be influenced by MOQs when ordering from suppliers as an ecommerce seller.
The MOQ can be passed on to your customers to help you overcome financial limitations. Your suppliers may be more willing to accept larger orders if you encourage customers to buy more products. Let’s say that you sell stationery. For example, if your supplier demands 100 pencils, you can set a MOQ to five units and pass it on to your customers. You only need 20 orders to meet the supplier’s MOQ.
MOQs may have an impact on the suppliers you can access. If you are smart and pass the MOQs onto your customers, you can gain access to higher MOQs from suppliers and expand the range of suppliers you can work with. If you’re required to break the minimum order quantity policy by a customer, you should consider whether the situation will benefit you or not.
In these situations, perhaps the customer is looking to check your credibility by examining the terms of your MOQ. In another instance you could be in the process of entering into the market of a new one and have to take on smaller orders in order in order to establish yourself with your new client. There is no doubt that you’re not a charity, but an organization that has an objective of profit to the ultimate end. It’s okay to do small sales per one day or so.
It would be helpful to look out for the costs you incur also. So, instead of completing an order at various times throughout the day, you should try to do it less often by adjusting your minimum order quantity depending on the production, manufacturing operational, shipping, and costs.
2) Cash flow
The MOQ determines how much cash you have invested in stocks. This directly affects your cash flow. Your supplier’s MOQ will determine how much your money is in stock. This can impact your budgets for other areas, such as marketing and growth.
3) Reordering
While low MOQs are a great way to order fewer items, it can also mean that you will spend more on stock replenishment. Offer bulk order discounts to incentivize customers into buying higher product quantities. This strategy is a win-win as customers will buy larger quantities and receive bulk purchase discounts. There are two types MOQs. One is low, and one is high. How long do your products last before running out? The MOQ will tell you how much you can order in one go. This will help to avoid over ordering or wasting money.
Multi-buy deals, bulk orders, and bundles can be presented to customers to help introduce MOQs in your online store. Customers won’t see a product that says “you must order ten units” but will instead see products already packaged in multi-buy offers.
Caveman foods offer nutrition products in pre-determined bundles. This is a great example. There is no way to buy just one bar. Customers are required to purchase the MOQ of 12 to place orders.
Customers can save money when they buy multiple-buy products. Discounts up to 20% on bulk orders may incentivize customers to purchase products with low minimum order quantities. Your customers will get more products for their money while you make more money.
4) Quality
Suppliers can run profitable, effective businesses. As a result, This can often lead to higher quality products or better supplier relationships. It is a good idea for suppliers to be questioned about unusually low MOQs. Additionaly, Businesses aim to make good products and earn profits. Like company owners and manufacturers, it’s essential to prove your effectiveness and run a profitable business.
Their MOQs can help them do that and many other production-related things. Suppliers with a high MOQ tend to sell high-quality products, attracting customers and encouraging them to spend more. Look into any company with low MOQs to verify that they provide quality products.
5) Warehousing
This will affect how much space you have for these products. This can also impact security and insurance costs, staffing, and cost of goods. Your inventory will require more freedom when working with MOQs. Your inventory management processes must be optimized for purchasing large MOQs directly from suppliers and selling them to customers or retail partners.
Additionally, when you work with MOQs, your inventory levels will naturally rise, as most of your revenue will be held in physical inventory assets. If your MOQ is high, you might have more stock and reduce inventory turns. You should allocate enough warehouse space to wholesalers and retail partners that want to purchase large MOQs. As a result, insufficient inventory space can lead to product shortages.
Furthermore, you can optimize your inventory management by understanding the demand and inventory reorder point points. Appointing a third-party logistics (3PL) partner for wholesale orders can reduce the risk of supply chain disruptions. Pass fulfillment to a DTC fulfillment partner to handle order prep while you work on growing your ecommerce store.
6) Profits
Finally, the MOQ (minimum order quantity) of a product impacts how many products you have to sell to make a profit and your product pricing strategy. You may also need to spend more time on marketing, advertising, multichannel sales, fast shipping, and other related costs. Understanding MOQs will help you use them and make money. Furthermore, they allow you to estimate profits, set up your warehouse space, calculate how many products you need in one go, and many other benefits. Despite being primarily focused on the eCommerce seller and their MOQs, both sides benefit.
Chapter 5: Frequently Asked Questions about MOQ
1) What is the minimum order quantity (MOQ)?
Minimum order quantity represents the minor order a supplier/manufacturer/wholesaler is willing to fulfill.
2) How can I set a minimum order quantity?
Begin by comparing the gross margin per unit sold to the production cost. It is vital to include the complex fees of stuff like materials, marketing, and admin. It is essential to ensure that each order is profitable.
3) How can I work out a minimum order cost?
For a profitable MOQ, determine your sales volume, overheads, profit per unit, and profit per unit.
4) How does MOQ relate to the overall supply chain?
There may be multiple MOQs in a single supply network. Consider that eCommerce businesses may purchase goods with a specific MOQ from their supplier.
Conclusion
E-commerce brands can benefit from minimum order quantities as a selling advantage. As a result, MCQs can help increase the return on your investment, whether you are encouraging online shoppers to buy larger carts or forming wholesale partnerships.
When you think strategically about how to deal with MOQs, they don’t have the potential to become a supplier problem. Look at MOQs as an opportunity for growth and to reap the benefits they offer.
Moreover, MOQs are designed to allow wholesale distributors to maintain sustainable business models. If the seller and buyer have a long professional history, they may be flexible.
Respecting each other’s money, time, and resources is critical. Relationships built upon mutual respect have the potential for lasting success.
MOQs allow wholesalers to have a better handle on their profit margins. MOQs are a way for wholesalers to keep their bottom line intact, even if they sell less. Minimum Order Quantity is also required for consumers to purchase specific products to guarantee that more money is earned with each order.
Setting the correct Minimum Order Quantity for your business is vital to success. Here are some tips to ensure you have the right number so your business makes the most sales. Whatever number you choose to set for your MOQ must be enough to cover all costs, including your teams and any overhead.
Furthermore, higher overhead costs and more expensive products mean that your MOQ is required to maintain control of your expenses. However, higher MOQs are not always associated with more money. Higher MOQs can be an excellent way to drive sales. This number should not be set too high because it will hurt your business more than it helps.
The benefits of minimum order quantity are not limited to wholesalers or manufacturers. A low MOQ, such as an ecommerce website, can be a great way to encourage customers to fill their carts. You will need to test the balance, so you don’t order too much or too little.
