Minimum Order Quantity (MOQ)
Learn How to Earn More Setting Up Your Minimum Order Quantity!
Whether in wholesale, retail, or manufacturing, you’d better make your minimum order quantity calculation wisely to deal with company sales and to have an advantage at the end of the day. That’s why we drop this article to illuminate you on the definition of minimum order quantity, how it affects your stock status, its benefits for both buyers and sellers, and the ways to earn more by ideally setting up minimum order quantity. Reading further, you will better understand all these topics to adapt them to your business.
In this guide, we’ll help you understand:
- What is MOQ?
- What Does MOQ Do to Your Inventory?
- How to Set Minimum Order Quantity for Buyers
- What’s in It for Suppliers?
- Set Up Your MOQ Terms like a Pro to Earn Big!
- Beware of the Downsides of MOQ
What is MOQ?
If you are the new kid in the business trying to understand the conversations in a meeting, you most probably ask yourself, “What is minimum order quantity?” when you have heard it. Let’s start with making minimum order quantity definition crystal clear for you. A minimum order quantity, briefly set as MOQ, is the lowest inventory a supplier plans to sell. Even though you are a wholesaler or a retailer, your customer must select a minimum order quantity to fulfill an order. We need to state also that all MOQs may vary according to the type of product. Higher costs will usually have lower minimum order quantities, while lower prices may require higher MOQs. The reason behind this fact is because the low-ticket products are generally easy and cheap to produce. This situation is also different between retailers and wholesalers. For example, when you go to amazon.com and want to buy a chair for your garden, your minimum order quantity will be lower when compared to the one on a wholesale platform. Suppliers maintain their minimum order quantities to generate profit. To do so, they need to calculate all the expenses from manufacturing to shipping. Once a total cost is defined, a minimum order quantity is set to make the supplier worth his while. Let’s see an example to understand better. Say that your business has a minimum order quantity of 1000 units. Then your customers must buy a minimum of 1000 units for an order. That also means that the MOQs of every supplier will be different from each other depending on their costs.
What Does MOQ Do to Your Inventory?
Minimum order quantities make a big difference when it comes to your inventory position. For example, if a seller has a high MOQ in place, his inventory must behold in higher quantities. This situation will lead to higher stocking costs as the products with a large stock volume will require more space in the warehouse. Vice versa, a seller with a lower minimum order quantity, has the chance to hold a lower level of inventory. Consequently, a lower investment of working capital is required, and the risk of obsolescence is decreased to a great extent. However, in terms of order processing and admin, lower minimum order quantity turns out to be the evil kid since the customers will review and order these products far more frequently. To conclude, we can generally say that:
Suppliers with lower minimum order quantity have:
- A lower level of inventory costs
- Lower investment of working capital
- Reduced risk of obsolescence
- Risk of higher-order processing and admin costs
Suppliers with higher minimum order quantity have:
- Increased inventory costs
- Higher investment of working capital
- Increased risk of obsolescence
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How to Set Minimum Order Quantity for Buyers
Minimum order quantities may vary when looked at from different perspectives of buyers and sellers. Buyers, for example, have their own inventory needs and fulfill their orders accordingly. Usually, they need to shop around for various sellers till they find the price they want. Sometimes it is important to see other offers and place the order afterward. However, it would be best if you were careful when choosing the right supplier. First, should search each seller in detail to see if they are safe and verified. The next step is to check if they can meet your MOQ needs ideally. The last step will be reading the customers’ comments before making your final decision. Also, the economic order quantity method can determine how much inventory needs to be purchased. Remember, minimum order quantity is not a one-size-fits-all deal. Having many other options in front of you gives you the freedom of choice in a competitive market.
Sometimes, if a customer demands a lower MOQ, the supplier may be willing to revise its minimum order quantity to keep clientele slightly. That’s why it may be helpful to keep negotiating in mind if you have a strong relationship with the supplier. For example, while dealing, you can offer to buy half of the inventory now and the rest later. This tactic will save you time and money. Another way to negotiate for demanded MOQ is to use one company’s prices against another. This “price matching” method can provoke the seller and makes you reach your target easily.
What’s in It for Suppliers?
Adding a MOQ to your business operations will significantly change your cash flow, shipping costs, sales figures, negotiating communications, and profitability. That’s why no matter if you are a retailer or a wholesaler, you need to set a minimum order quantity formula to make stability within your business. For example, if you have a recurring customer buying a total of 20 units of the same item every two months, try to make him accept the same amount at one time. Doing so will put your orders in the book and make your cash flow steady.
Keeping your MOQs high enough, you can do your warehouse management healthier. Say that you sell small units of products quite frequently. In this case, you end up with higher staff time and shipping costs. Instead, if you manage to sell a higher volume of items simultaneously, it will reduce the shipping ad packing costs to a big extend. You will enjoy the actual savings.
Whenever you are asked to violate your minimum order quantity policy by a customer, think if the negotiation is to your advantage or not. In those situations, maybe a big customer wants to test your credibility through your MOQ terms. In another case, you may be on the verge of stepping into a new market and need to accept smaller orders to confirm yourself to your new customer.
No doubt that you are not a charity but a commercial company with a profitability purpose at the end of the day. It is OK to make small sales amounts every one or two days. However, it would help if you looked out for your costs, too. That’s why instead of fulfilling an order various times a day, try doing this less frequently by optimizing your minimum order quantities according to your production, manufacturing, operating, and shipping costs.
You may also like: The bullwhip effect is covered in depth here. Check our article to learn more about the causes, consequences, and impacts of the bullwhip effect on the supply chain.
Set Up Your MOQ Terms like a Pro to Earn Big!
To earn more in your business, you need to know how to set the minimum order quantity in detail. For example, if you run a wholesale company and deal with large amounts of orders, the MOQ can help you make significant profit margins. Say that you have one retail and one wholesale sales platform, and you earn $20 per unit through your retail channel. Because of the retail business nature, you cannot control the order quantities determined by the customers. However, you can choose to reduce the price to $10 per unit on your wholesale platform if $400 worth of products is sold in your retail one.
That’s why you need to wisely set up your minimum order quantity terms to pay for the materials, personnel salaries, utilities, and other costs. Here are two tips you can benefit from while setting up your MOQ:
Higher MOQs: You may use this tip if you have expensive raw materials in your manufacturing operations requiring long person-hours.
Lower MOQs: You may use this tip if you have a relatively easy and cheap material to produce.
Beware of the Downsides of MOQ
Though it is generally beneficial to have clear minimum order quantity terms, you should be aware that there are still disadvantages on the way. Especially if you have customers who do not want to order minimum quantities, you have to flex your muscles by allowing them to buy the quantities they want. Because if you place a high barrier on their way, they may not come to you for their next shopping experience leaving you with a rising customer churn. Another disadvantage of MOQ is the status of your competitors. If they do not have a minimum order quantity list, potential customers may find them more attractive. That’s why it will be to your advantage always to check your rivals’ websites to see if they’ve listed MOQ or not. Sometimes, some customers buy large volumes of items and decide to return them later. So, please set your minimum order quantity by looking at your return policy. Doing so will make you see if you need to adjust the procedure on the way.
What is a minimum order quantity (MOQ)?
The minimum order quantity (MOQ) or minimum unit order is the minimum order quantity a supplier agrees to sell. MOQ can be adjusted on an order basis, product basis, material basis or color basis.
What is the formula for minimum order quantity?
While there is no standard formula for calculating MOQ, forecasting demand for products, proactively planning, calculating volume discounts and measuring inventory costs can all be used to determine MOQ. If you are a manufacturer, supplier, wholesaler, etc. you can look at gross profit margin per unit sold and compare it to your overall production costs to aid this process.
Why is minimum order quantity important?
Minimum order quantity (MOQ) is essential for maintaining good inventory management. It helps operations accurately calculate how much inventory is needed and how much to sell in order to save money and storage space.
What are some common mistakes to avoid when calculating MOQ?
As a best practice, it is paramount that you do not overestimate production capabilities or forget about potential setbacks (ex. lack of raw materials, a buyer canceling, or supply chain fluctuations).