Ecommerce retailers could come across the term MOQ (minimum order quantity) either when ordering from their suppliers or when setting one for their customers. This guide gives you an understanding of how to get the most out of them in both of these circumstances.
What does MOQ mean?
MOQ stands for minimum order quantity. It’s the minimum amount someone can order from a supplier for the order to be accepted. It is typically set as a minimum number of units per product (or cases/packs in some scenarios); but can also be set as a “Minimum Order Value” where the order must meet a certain price threshold across a variety of products, to be accepted by the supplier.
When is setting a minimum order quantity useful?
Businesses use MOQs to take advantage of the ‘economy of scale’. This is when the average cost per unit drops whilst the number of units produced increases i.e. it costs a lot less (per magazine) to print 4000 magazines than just one, which is why it’s usually cheaper to buy things in bulk!
Setting a minimum order quantity enables businesses to operate efficiently. Selling bulk quantities of products typically cuts the profit margin on each individual unit when compared to selling DTC (Direct-To-Consumer) one at a time, but the larger orders can provide excellent revenue and boost cashflow when implemented correctly. Without an MOQ in place, some orders may not be economically viable to fulfill.
Calculating what MOQ to set
There is no ‘off-the-shelf’ formula for calculating a minimum order quantity for your business. However, the following factors will help you create a formula that you can use.
Work out demand
To work out your MOQ, you first must understand the demand for your products. Demand forecasting should account for seasonality, competition and product type.
Tips on monitoring demand especially during peak times:
- Ensure you have enough safety stock to manage any large fluctuations in demand. Calculate it here.
- Be in conversation with your supplier(s) regularly.
- Review sales forecasts frequently.
Work out your break-even point
When setting an MOQ it’s vital to understand the unit economics of each product you sell. Most importantly, you need to know your break-even point. If you understand this thoroughly then you should be able to answer these two questions:
1.) How many units need to be sold to make this transaction profitable?
2.) How many sales do we need to make for the profits to cover the business’s expenses?
Factor in all other expenses
It costs money to store products, more some than others: making it more beneficial if items are not kept in stock for too long. This would be the Inventory Holding Cost. When calculating this, take everything into account, such as warehouse overheads and employee wages. Take a look at the calculation:
Inventory Holding Cost = (Storage Costs + Employee Salaries + Opportunity Costs + Depreciation Costs) / Total Value of Annual Inventory
Set out a strategy and review
Once you have put your key data together, you should be in a position to turn this into a formula. You could even put it into a spreadsheet for ease. You will also need to lay out how you will get customers to order at the quantities you want. If this involves getting current customers to up their regular order amounts this may require a particular marketing plan.
You will then need to regularly check that your formula is accurate and amend accordingly.
Advantages and disadvantages of MOQs as a buyer
The obvious advantage is that they give buyers a better price per unit than buying products individually. It may also be easier for you to manage one large order as opposed to several smaller ones (less management time, less time in the warehouse and less paperwork).
The biggest disadvantage to having to comply with an MOQ as opposed to purchasing individual items is the larger upfront cost that will be required to make an order, tying up your cash in an inventory investment.
How to negotiate the best MOQ as a buyer
But what happens when you find a supplier you like, the samples are good but the minimum order quantity is too large for you?
Don’t feel despondent, as there are several tactics that you can apply to help reduce them. All it takes is a little bit of patience and some clever strategies:
Point out that you are a new buyer
As a first-time buyer and being new to the company, explain to the supplier that you need to test the water. If their MOQ is 1000 units, go for a quantity of say 250 for your first trial order. Explain to them that once you have tested the product, you will be able to up the quantity.
You have nothing to lose by negotiating with the supplier and very often, they will accept your reduced quantity order quickly. This is because all suppliers want orders and if the majority of their customers are buying in line with the MOQ; they can facilitate a lower quantity for you as a one-off without damaging their profit.
Occasionally you might find they will want to increase the price of the product (per unit); this is reasonable, and oftentimes you can ignore the increased price in your profit calculations for the viability of selling the product. Ultimately, this is only a test of the product and if it sells well then you’ll be buying at the increased quantity in the future and accessing the better price per unit.
Mix and match the product type
In this example, you ask to order a mixed bunch of products from the same supplier but without adhering to the MOQ for each one. Overall, the supplier should be happy as you will be working to the minimum order quantity overall, but not for each item individually. This is referred to as meeting a “Minimum Order Value” instead of a “Minimum Order Quantity.This should provide a win-win scenario for both parties; you will not be left with a massive volume of each product, spreading the risk and your money over a varied product line and the supplier doesn’t lose out if they were already holding stock of the products you ordered. This can only work where several products appeal to you and where the supplier has a good selection.
Look to find deals on overstocked goods
Many suppliers will only manufacture when orders are required (just-in-time manufacturing) rather than producing large quantities to keep in stock. This improves the company’s profits as it is very cost-effective.
However, the world being as it is, sometimes they may be left with a cancelled order or simply a situation where they have excess stock. Now they have items in the warehouse ready to ship and eager to be sold. Because circumstances are different, the supplier will usually sell this stock off in any quantity as they wish to be rid of it. Always ask if there are any overstocks or cancelled orders and if the product fits with your needs, offer to take it.
Work with other buyers
Sometimes it may be feasible to “go in on” an order with another buyer who wants the same product. Then you can get the quantity you want and split the costs.
By using these strategies, you could drastically reduce the amount you have to order. But bear in mind that when you bu below the minimum order quantity, you will hardly ever achieve the best price.
If there comes a time when your negotiating doesn’t work, be ready to walk away and buy elsewhere. It is always worth shopping around for a better deal!
If you are looking at setting up an MOQ, you may want to look at Veeqo’s demand forecasting feature. Or if you want to learn more about inventory management, you can read one of the below guides next.