Minimum Order Quantity (MOQ) Meaning, Formula, & 6 Tips

Minimum order quantity is the fewest number of units a business wants to sell to a customer at one time. In ecommerce, it's most often used by a ... CreateAccount Skiptocontent MinimumOrderQuantity:HowtoCalculateMOQforYourEcommerceBusiness&TipsonNavigatingThem ByKristinaLopienski August28,2020 ConnectWithaFulfillmentExpertToday. GetStarted Intheworldofecommerce,inventoryistypicallyabusiness’sgreatestasset.Youwanttohaveenoughofitsothatyoucanmeetdemandbutnotsomuchthatyoucan’tsellthroughit. Purchasinginventoryorrawmaterialsisn’talwayssosimple.Notonlydoyouneedtofindamanufacturerthatsellstherightsuppliesattherightpricebutalsoonethatallowsyoutoorderanoptimalamountofunits. Manymanufacturersinstituteaminimumorderquantity(MOQ)togetyoutocommittobuyingenoughsotheycanbecost-effectiveinproductionandmakeaprofit.It’swhyyoubuyadozeneggsatonceratherthanasingleeggatatime. However,youridealunitcountorreorderquantitymaynotmatchyourmanufacturer’sMOQ,whichisoneofthejoysofrunninganecommercebusiness. Ofcourse,thesuppliersyouworkwithmaychangeovertime,aswillyourproductionruns.Yourfirst20,000unitsmaylookverydifferentfromtheinventoryofyour1millionthunit—notjustintermsofthephysicalproductitselfbutyourcashflow,profitability,andfinancialhealth. Inthisarticle,we’llgiveanoverviewofminimumorderquantity,takealookatsomevitalfactorstoconsiderwhencalculatingMOQrequirements,andprovidetipsonhowtomakethemostofMOQs. Whatisminimumorderquantity(MOQ)? Minimumorderquantityisthefewestnumberofunitsabusinesswantstoselltoacustomeratonetime.Inecommerce,it’smostoftenusedbyamanufacturerorsupplierinthecontextofaproductionrun,thoughamerchantcanputMOQsinplacefordifferenttypesoforders. Acoupleexamples: Asupplier’sMOQmaybe1,000units,meaningyoucanbuynolessthan1,000unitsofinventoryatatime.Similarly,abrandmayhaveanMOQrequirementforwholesaleorretailpartnerships,wheretheyrequireaminimumof50unitsor$500worthofproducttobepurchasedtogether. Howtocalculateminimumorderquantityin4steps ThereisnoonerightMOQamount,asmanybusinesseshavedifferentrequirements.Ofcourse,thereisoftenatradeoffbetweenhavingahigherMOQorpayingahigherpriceperunit.Whilethereisn’tago-toformulaforcalculatingminimumorderquantity,youcanusethestepsbelowasastartingpoint. 1.Determinedemand Asamerchantpurchasinginventory,demandforecastingtakesproducttype,competition,seasonality,andotherfactorsintoaccountinestimatinghowmanyunitsyouwillsell.Thisdatacanhelpinformyournextpurchaseorder.Inventoryforecastinggoeshandinhand,tomatchsupplywithdemandinthisequation. Youmayfindtheminimumorderquantitywantedfromthemanufacturerisn’tfarofffromwhatyou’llsellthrough.You’llalsowanttoaccountforyourtotaltimelinetogettheinventoryreadytoship,includingleadtimes,freighttransittimes,warehousereceivingwithyourthird-partylogisticsserviceprovider(3PL),andotherpotentialdelays,asyoumayrealizeyouneedtoorderinventorysoonerthananticipated. Afewtipsonmonitoringdemandespeciallyduringvolatiletimes: Beinconstanttalkswithyoursupplier(s).Makesureyouhaveenoughsafetystocktomanageanylargefluctuationsindemand.Reviewsalesforecastsweekly,ifnotdaily,toadjustproductionquantities. 2.Calculateyourbreak-evenpoint Ifyou’retryingtoestablishaminimumorderquantityofyourown,you’llneedtoknowyourbreak-evenpoint.ThismayhappenonthesecondtransactionforDTCorders,whenyourecoverthecustomeracquisitioncostandyourcustomercomesbackthroughemailmarketingefforts. Forwholesalerelationships,considerwhatthelowestper-unitdollaramountyou’rewillingtochargeinexchangeforahigherordervalue.Itcan’tbesolowthatyourprofitmarginsarenexttonothing,butvolumediscountsareexpectedifyou’renotjustpayingforsmallerquantitiesatahigherprice. 3.Understandyourholdingcosts Someproductsaremoreexpensivetostorethanothers(duetosize,durationofstorage,andspecialwarehousingrequirements).It’sfinanciallybeneficialtoensuresuchitemsarenotkeptinyourinventoryfortoolong. Yourinventoryholdingcostisthetruecostofstoringallofyourproductsandsomethingyoumustconsiderbeforeinvestingtooheavilyininventory. 4.ComeupwithyourMOQ Let’ssaythatyouconsistentlyhaverelativelyhighdemand.Yourpartnerspurchase200unitsperorderonaverage,andyouneedtosellatleast150unitsperordertobeprofitable. Ifyourpartnersorcustomershavebeenwillingtobuy200-unitordersinthepast,youcouldset200unitsperordersasyourminimumorderquantity,orevengodownto150. Howtomakethemostofminimumorderquantities MOQtermsmayseemawfulwhenyou’reonthepurchasingsidebutawesomewhenyou’reonthesellingside.Manyecommercebusinessesworkwithmanufacturersthathaveminimumorderquantityrequirementsinplace,andsomebrandswillbeinthepositionofimplementingtheirownMOQsthroughwholesalepartnershipsorminimumspendthresholds. Nomatterwhereyouare,herearesometipsonhowtoworkwithMOQs. Incentivizeahigherspendonyourorders Ifyou’regettingintowholesaleorretail,youcanrequireMOQsforbulkbuyerstohelpensureretailerspayyouaminimumamount.Inexchangeforaminimumspend,youmaychoosetoofferordervolumediscounts,whereyouchargetheretailerlessperunitinexchangeforahigherguaranteedoverallspend. Also,youcanadjustthepricestohelpincentivizehigherspend.Todothis,youneedtosetMOQbasedonvolumeorcost.Forlow-costitems,youneedtosetahigherMOQ.Thisensuresyoumakeaprofit.Forhigher-costitems,havinglowerMOQworks,astheitemsarealreadymoreexpensive.Followingthisstrategyhelpsyoumakeaprofitnomatterifyousellsmallorlargequantities. Similarly,youcantestthisstrategyforyourdirect-to-consumerordersbyrequiringaminimumamountofproductstobesold(e.g.,3bottlesofabeverageeachpricedat$10toensureyourordervalueisatleast$30)tocovercustomeracquisitioncostsandthecostofgoodssold. Youcanalsotrythiswithafreeshippingminimumspendthreshold,whereyourequirecustomerstospendacertainamountofmoneytoqualifyforfreeshipping. Eliminateslow-movingSKUs Oftentimes,brandswillhavemoreSKUsthantheyshould,andthey’llbestuckpayingforstorageanddolingoutcashtofulfillMOQsforproductsthatdon’tsellordriverevenue. KeepingyourSKUcountsimpleandminimalhelpswithinventoryforecasting.Thedifferencebetween20and40SKUscanbehardenoughtomanage,letalonemanagingupto400SKUs.It’seasytooverestimatetheuseofnewcolorsandslightvariationsinproducts.Alotofthetimeforecommercestoreexperiences,havingmorethanthreeoptionsistoomuchtothinkabout. “Don’tgocrazywithyourSKUcount.Focusonkeepingacatalogsmallwhilestillbeingabletoincreaselifetimevalueandnewsales.Foralotofbrands,3SKUsmakeup50%ofsales.Youprobablydon’tneedhundredsofproductsthataren’tdrivingrevenue.”RyanTreft,Founder&PartnerofCoalatreeandPeejamas Boostinventoryturnover Orderingexcessinventoryincentivizesyoutohaveahigherinventoryturnoverratio,meaningthere’spressuretosellyourinventoryquickerbecauseyouinvestedmorecashupfront.Thisdoesn’tmeanonlyrunflashsalestodepleteinventorybutseekoutcreativewaystoattractandretaincustomers. Iftheminimumorderquantityamountistoohighandyouhaven’tprovenoutyourbusinessmodelorproduct-marketfityet,it’sbesttolookelsewhere.Otherwise,you’llhavespenttoomuchmoneythatyoumaynotbeabletorecover,whilealsopayingforwarehousing. Findothersuppliersordistributors IfyourmanufacturerhasahigherMOQthanyou’dlike,youcanalwaysattempttonegotiatewiththem.There’snoharmintrying!Ifthemanufacturerdoesn’tbudgeandstillrequiresanMOQthat’stoohighforyou,considerworkingwithatradingcompanyorwholesaledistributor,themiddlemenwhobuyinbulkfromamanufacturerandresellsmallerquantitiestoothers. Askotherquestions You’reallowedtogetcreativeinyourconversationswithmanufacturersandsuppliers.Tryrephrasingquestionsorthinkingoutsidethebox: Seeifamanufacturerwillletyou‘mixandmatch’ororderseveraldifferentproductstohitanMOQ,ratherthanonlyidenticalunits.Askthemanufactureriftheyhaveleftoverproductsfromothercustomerswhohavecanceledordersandthus,don’trequirethemtoproduceanythingfromscratch. Focusonrelationships It’spossibletostartwithgoodtermsfromamanufacturer,butitbecomeseveneasierovertimeespeciallywhenyoubuildagoodrelationshipwiththem. Here’showitworks: Yousellyourmanufactureryourvisionandgetthemboughtin.Yourecommercebusinesskeepsgrowing.Yourmanufacturerishappyastheykeepmakingmoneyalongsideyourgrowth.Youpaythemontimeandordermorefromthem.Overtime,theymayofferbettertermsandbemoreflexiblewithyou. “Manufacturerswantyoutosucceed.Thelastthingtheywantisforyoutogooutofbusiness.Ifyou’renotgoingthroughinventoryorsellingit,theyhavenomotivationtohelpyou.Sellthevisionofyourcompany,letthemseethepotential,yourcreativemarketing,andhowyou’redifferentiated.Iftheybelieveinyourbrand,theyarenotjustyoursupplier,butapartner.”SamLewkowict,Co-Founder&CEOofBlackWolf We’reallhumanandwanttosucceed.Overeverythingelse,remember: Viewitasapartnershipandnotatransactionalrelationship.Ifamanufacturerisn’twillingtoworkwithyou,theymightbethewrongpartner.Treatpeoplewellnomatterwhat.Partnershipsareveryimportantespeciallyrightnow,intimesofaglobalpandemic. SuccessfullyimplementingminimumorderquantitywithShipBob ShipBobisaleading3PLthatfulfillsDTCecommerceordersandevensomeB2Becommerceordersformerchants. ShipBob’ssoftware,algorithm,andanalyticsworktogethertohelpyoumakebetterdata-drivendecisionstooptimizethesupplychain. 1.Built-ininventorymanagement ShipBobofferspowerfultechnologywithbuilt-ininventorymanagementsoftwarefeaturesincludingtheabilitytosetreorderpointsforindividualSKUs.ShipBobalsohasafreeanalyticstoolthatprovidesadvanceddatavisualizations,inventoryforecasting,real-timeinventorycounts,andmore.Getanswerstoquestionslike: Whatweremyhistoricalstocklevelsatanypointintimeinanylocation?HowmanydaysdoIhaveleftuntilaSKUwillbeoutofstock?BywhendoIneedtoreorderinventoryforeachproduct?Howofteniseachproductsoldacrosschannels?IfIrunasaleonmysite,howwillthisaffectmyavailableinventorylevels?Howdoesproductdemandcomparetopreviousperiods?Howaremysalesaffectedbydifferentseasonsandmonths?Whataremybest-sellingitems?Whichitemsarenotgeneratingsalesandincurringhighecommercewarehousingfees?Whatismyaveragestoragecostperunit?Whatisthetotalnumberofbins/shelves/palletsI’mbeingchargedfor?Andmore! “ShipBob’sanalyticsdashboardhasalotofvaluablereportsthatshowourtop-sellingstates,orderrevenueandcosts,unitssold,salesbySKU,daysofinventory,SKUvelocity,salesvs.inventorydistributionsshowingwhereourcustomersareandwherewe’reshippingfrom,andmore.”AndrewHardy,COOofNature’sUltra “ShipBob’sanalyticstoolisreallycool.Ithelpsusalotwithplanninginventoryreorders,seeingwhenSKUsaregoingtorunout,andwecanevensetupemailnotificationssothatwe’realertedwhenaSKUhaslessthanacertainquantityleft.Thereisalotofvalueintheirtechnology.”OdedHarth,CEO&Co-FounderofMDacne 2.Distributedinventory ShipBobhasanumberofwarehousesstrategicallyplacedacrosstheUnitedStates(andevensomeabroad).Weletyoudistributeyourinventoryacrossmultiplewarehousestooptimizeorderdeliverytimesandshippingcosts.Whenacustomerplacesanorder,itwillbepicked,packaged,andshippedfromthenearestlocation.ThereductioninshippingcostscanhelpoffsetthehigherspendduetoMOQrequirementsinsomecases. 3.Wholesaleshippingcapabilities WithShipBob,onlinestoreownerscancreateandmanagewholesaleordersentirelyfromonecentraldashboard.WhileShipBobprimarilyspecializesinDTCfulfillment,itsB2Bfulfillmentcapabilitiesareexpandingmoreovertime. Conclusion Oneofthebiggestbarrierstostartingabusinessisthecapitalrequiredtogetupandrunning.Aminimumorderquantitymaypreventsomebusinessesfromworkingwithamanufactureraltogether,butanMOQcanoftenbebetterinthelongrunforsomebrandsratherthanbuyingasmallerbatchofinventoryatahigherper-unitcost(whenyoufactorinthehigheraveragecostovertimeaswellasfreightcoststoaccountforthehigherfrequencyofreorders). Thebestminimumorderquantitywillvaryacrossbusinesses,anddeterminingtherightbenchmarkrequiresalotofresearch,thoughtfulsalesplanning,andluck.FindinganMOQthatworksforyoucanhelpyouscaleyourbusinesswhilekeepingitprofitable. TolearnhowShipBobcanhelpwithfulfillment,storage,andinventorymanagement,clickthebuttonbelowtolearnifwe’dbeagoodmutualfit. RequestFulfillmentPricing MinimumorderquantityFAQsEcommercestoreownershavemanyquestionsregardingminimumorderquantityrequirements,andrightfullyso.We’veprovidedanswersbelowtosomecommonFAQs. 1.Howdoyoufindtheminimumorderquantity? Thereisnostandardformulaforcalculatingminimumorderquantity.TodeterminetherightMOQforyourbusiness,it’sworthforecastingdemand,doingscenarioplanning,calculatingvolumediscounts,andinventorycarryingcosts.Youcanthendecidethelowestquantitythatworksforyourbusiness. 2.Whenshouldminimumorderquantitiesbeapplied? Ifyouareamanufacturerwhoneedstoproduceproducts,thenenforcingMOQtermsisimportanttostabilizeyourprofitmarginandmakeitworthwhiletoproduceinthefirstplace.Ecommercebusinessesthatsupplyproductstypicallysoldinsets,suchaskitchenware,shouldalsohaveminimumorderquotasthroughpackagingorbundlingtoincreaseaverageordervalue,andtheycouldalsoexploreMOQsforwholesalepartners. 3.WhatisMOQinthesupplychain? Intheecommercesupplychain,MOQistheminimumnumberofunitsofasingleSKUthatabusinessmustpurchasefromamanufacturerorsellerinoneproductionrunorpurchaseorder. 4.WhatisthedifferencebetweenMOQandEOQ? Economicorderquantity(EOQ)isanequationusedtodeterminetheidealquantityofinventorytostockinyourwarehousesothatyoudon’tspendtoomuchonstoragebutalsodon’trunoutofproducts.MOQistheamountofproductasupplierorsellerrequiresapurchasertobuyatonetime.AnMOQcancauseanecommercebusinesstopurchasemoreinventorythantheyneedatonetime,causingthemtobenowhereneartheirEOQ. WrittenBy: KristinaLopienski KristinaistheDirectorofMarketingCommunicationsatShipBob,whereshewritesvariousarticles,casestudies,andotherresourcestohelpecommercebrandsgrowtheirbusiness. ReadallpostswrittenbyKristinaLopienski Close Let'stalk.Ourexpertscanhelpyouboostyourordervolumeby30%yearoveryear. Afulfillmentexpertwillgetbacktoyoushortly. Close LoadingJob... JobDescription: Close