What Is MOQ & Why Does It Matter For Your Business?
Ever feel like you’re swimming in alphabet soup? You’re trying to stay on top of CRM while WFH and focused on YTD ROI by keeping your CPU down. Or you’re struggling with the FTP on your CPU or ISP or VPN. What do all those letters even mean?
All the same, every once in a while one of those acronyms can have a big impact on your business, your profitability, and your cash flow. MOQ is that important. Those three letters stand for minimum order quantity, and you need to understand them if your business model involves either:
- Selling products wholesale
- Buying products from wholesalers or manufacturers
If you’re making your own products and selling them directly to end-users, MOQ may not have much of an impact on your business, though you may encounter MOQ when you order from your suppliers. For everyone else, it’s definitely time to learn more about MOQ, why it matters, and how to make it work for you.
Table of Contents
What Is MOQ?
The letters stand for minimum order quantity. But what does MOQ mean?
MOQ involves a cost of doing business that’s not always obvious: the cost of making and shipping products. To use a very basic example, think of MOQ in terms of an everyday, inexpensive item: a pencil. You probably can go into a retail store and purchase a single pencil. But if you want to order a pencil from an online store, you may not be able to do that — and if you’re looking to buy a single pencil directly from the manufacturer, you’ll probably be out of luck.
Online sellers, wholesalers, and manufacturers often sell their products in packages, or in bulk. Pencils, to return to our very simple example, typically come in packages of 12 or even 24. In this case, it’s not worth the manufacturer’s or online store owner’s time to send out a single pencil, and even if they were willing to do so, the shipping costs for that one pencil would seem extremely high to customers who are used to today’s “ship it fast and ship it free” eCommerce environment.
There are other reasons for setting MOQ on products. Some manufacturers, for example, won’t want to go to the trouble of establishing relationships with resellers who can’t commit to a minimum order and reorder quantities. And for some specialty or very expensive items, the cost of materials and manufacturing costs may make it impractical to create products in small quantities. So if you want to order, you need to make your order worth fulfilling.
Why Is MOQ Important?
Minimum order quantity primarily protects the manufacturers or resellers who set the MOQ and ensures that they maintain profitability for their business. But MOQ affects buyers, too. If the minimum order quantity requires them to order more products than they’re able to immediately resell, they’ll have to store the overage until they can sell it.
Of course, MOQ can also reduce the per-unit price too. Some sellers may be willing to work around MOQ for special situations, but buyers almost certainly end up paying for the privilege of buying less.
How MOQs Affect Online Retailers
Although this particular three-letter combination may be new to you, MOQ is more common than you might think. In fact, we take certain long-established MOQs so for granted that no one even thinks of buying certain products outside their standardly available quantities. Have you ever tried to purchase a single egg? How about two M&Ms? Although the idea of setting minimum order quantities might seem difficult to implement or impossible for your customers to accept, it’s worth taking a second look.
Clearly, no online seller is going to demand that retail customers order a dozen shoes or a case of sweatshirts. Still, it’s possible to encourage them to buy more, with BOGO offers and free shipping. That’s not the same thing as setting a MOQ, but it’s for the same reason: wanting to sell more to increase or to ensure your profitability.
However, if you resell products that you purchase from a manufacturer or wholesaler, you may run into MOQ as a factor in your buying decisions. In that case, there is a bit of good news. Yes, you probably will have to pay upfront for the merchandise, and you will have to store the items until you sell them, but when you buy in bulk quantities you can usually count on a reduced per-item price. So if you see a MOQ posted by someone you’re interested in purchasing from, make sure you ask about how the MOQ affects your cost vs. list price. You’ll probably like what you hear, because the cost savings can help offset the upfront purchase and storage costs.
As an online retailer, does the idea of setting an MOQ sound good to you? Make sure you understand the benefits of doing so — and think about the drawbacks, too.
Adding MOQ to your product catalog can benefit your business. Here’s how:
- Steady Cash Flow: When your MOQ policy requires your customers to buy items in larger quantities, you can improve stability within your business. Instead of letting them order 12 units over every three- to four-month period, encouraging them to buy a full dozen at one time doesn’t change the amount of business you do with them. But it does put orders in the book, and cash in your till, at a regular, reliable rate.
- Reduced Shipping Costs: Every time you pull and package an order, you incur staff time costs for that action. If you can pull orders less often, your staff time costs will naturally be lower. You’ll also spend a lower percentage of the total sale price on shipping, including packaging expenses. That’s especially true if you are keeping shipping costs artificially low to encourage orders. If you can keep costs down by shipping slightly larger orders less frequently, that can result in real savings, and you can decide whether you want to split that with your buyers.
- Stronger Sales: When your customers hold more of your products in inventory, they may be more strongly motivated to sell them. After all, a portion of their operating capital will be tied up in inventory, so moving that inventory is to their advantage. That’s not to suggest that you should use MOQ as a bludgeon to increase sales. That strategy is likely to backfire on you, sooner or later.
- Negotiation Strength: Whenever you set a policy, whether that’s MOQ, returns, or anything else, you should be prepared to someday violate that policy. No matter how well MOQ works to your advantage, someday a customer is going to ask for an exception to your minimum order policy. In business, whenever you’re asked to give ground, think about how you how the requested flexibility can benefit you. Maybe you’re hoping to break into a new market and need to allow a smaller order to prove yourself to a hesitant buyer. Maybe a big player wants to test your reliability without committing to your minimum quantity. Having a clear policy as a starting point for your negotiations means you’re bargaining from a position of strength.
- A Profitability Boost: It goes without saying that you’re in the business of making sales and moving product. But sometimes small orders eat away at your profitability. Shipping two or three items each week is steady business, sure. But at what cost? Each time you fulfill an order, you stop doing something else and devote time to filling that order. If you could do that less frequently, you can spend your time more profitably on other matters.
Even though MOQ policies deliver clear benefits, there’s a potential downside for you and for your customers too. Be aware of these potential hazards:
- High Barrier Of Entry: Your customers may not always appreciate having to order minimum quantities. That’s especially important to consider if you’re just starting out, you’re looking to expand into new marketplaces, or your products are high-cost. In cases like those, MOQ may not work to your advantage, if it discourages buyers from doing business with you. At the least, consider offering an exception to first-time buyers who may want to test your products or flexible payment terms for big-ticket items.
- Competitive Disadvantage: Look around at your top competitors’ websites. If few or none of them have MOQ listed, they may appear as a more attractive option to customers who are looking for products without having to commit to a larger quantity. On the other hand, if your competitors all have high MOQ, you may be able to gain the upper hand by offering a lower MOQ or doing away with it altogether.
- Risk Of Returns: While MOQ protects your profitability, it can lead incautious buyers to purchase more from you than they can expect to sell in a reasonable time frame. So before you set MOQ for your business, take a look at your return policy and decide if you need to make adjustments to it. Otherwise, you could end up with a flood of customer returns that more than wipes away your profits.
How To Calculate MOQ
There’s no set mathematical formula that business owners can use to calculate their ideal MOQ. Minimum order quantities will vary widely by industry, by delivery method, and more. However, there are some common factors. And before you can decide on a reasonable number to set as your minimum order, you need to do a little math. Start by looking up these figures:
Cost Of Materials Plus Labor
If you don’t already know what it costs to make your products, you need to start figuring that out right away. Understanding the value you put into each product — the raw materials as well as a percentage of fixed costs like special equipment and machinery and associated salary costs — will help you set not just MOQ but also prices that ensure long-term profitability.
Monthly Demand For Your Products
Is yours a high turnover industry, or do you have warehouse shelves full of slowly moving product? If your products already are flying out the door, you’ll have an easier time helping customers adjust to your new MOQ, and you probably can set it at a higher level. Look at how much your best customers are ordering each month or each quarter as well as how often they tend to order. That information probably suggests the very upper limit for your MOQ, unless you intend to push your best customers to buy more.
Remember that MOQ doesn’t have to push customers toward ordering a set number of each product, although you can set MOQ for specific items if you wish. Overall, setting a MOQ that’s just a little higher than your average order size is a reasonable starting point. Most of your buyers will easily meet that threshold, while those just below it will be motivated to order just a little more to sell. Less profitable customers may fall away, but that’s okay. You’ll be able to focus on doing business with your most profitable partners.
Your Profit Point
This one’s a huge variable. You may look at your profit point overall, as a company, or per item. MOQ might be lower for high-profit items.
When you look closely at what customers are buying, you might even discover opportunities to bundle your products in creative ways that encourage customers to buy more from you. And you can direct them toward higher profit items. Keep in mind that you’ll likely lower your price as you increase your MOQ, in keeping with wholesale practices.
Shipping costs depend on many variables: weight, package dimensions, and distance traveled are the biggest factors. In general, however, you can save money by shipping more, less often. Instead of putting one medium-sized package in the mail or shipping container each week, you can save by sending one big package out once a month. Once you see how much you spend on shipping, you’ll discover ways to spend less. Yes, bigger packages weigh more and take up more space, but you can still save money by shipping less often.
Salary & Overhead
These factors often are overlooked, although they’re too important not to take into consideration when setting MOQ. Shipping costs, for example, don’t stop at postage and carrier fees. To really understand the cost of shipping, you must factor in the cost of the person pulling and packing the orders, the shipping materials, and even the cost of maintaining whatever kind of warehouse you have. Build those considerations into your MOQ too. Sending employees to the warehouse shelves and having them print one set of shipping labels each month represents a cost savings over having them do it twice a week.
Your Customer Relationships
One more factor here may be intangible, but worth its weight in gold. As you think about setting MOQ, don’t overlook how it will affect your customers, both those who currently buy from you and those you hope to draw in for future business. While a high MOQ may make your profits soar for a time, that won’t last if dissatisfied customers get stuck with merchandise they can’t sell for months. And they certainly won’t be in a hurry to reorder or to recommend you to others.
So while you might not be able to attach a dollar value to a well-established customer relationship, understand its value and think about the ways MOQ will affect that relationship. You can score points by contacting your top customers to personally explain the new policy, answer their concerns, and show them how it can work out well for them too, in terms of lower costs, lower shipping fees, and more secure inventory levels.
How To Find Suppliers With A Good MOQ Offer
By now you probably understand the ins and outs of adding MOQ to your product catalog. But what about when you’re the buyer? Can you make your suppliers’ MOQ work to your advantage? Sure you can — and here’s how:
- Negotiate: Nervous about what hitting a MOQ will do to your own bottom line? Ask if you can order a variety of products to hit a dollar total per order, rather than a certain number of each unit. Maybe you change shipping methods to make it cheaper, receive a hefty discount, or more favorable payment terms, at least for a while.
- Show What Your Business Is Worth: What’s your hesitation about working with your supplier’s MOQ? It may be that you lack the warehouse space or don’t have the cash on hand to pay the bill right away. Whatever your situation, be prepared to make your case to the supplier. Show what your business has been worth over the years or how your order size will be increasing as you grow your business. When the supplier sees that you’re prepared to commit to a significant level of business over time, you may discover together at least a temporary way around the MOQ restrictions.
- Shop Around: If you can’t come to an agreement that works for both you and your supplier, are you prepared to move on? Do some research on other sources for the products you’ve been ordering. How does that other source compare in terms of price, quality, MOQ, and other terms? If you like what you see, you may be able to use that to strengthen your position at the bargaining table. And if that doesn’t work, you know where to take your business.
- Get Real About Your Inventory: When a supplier institutes a new MOQ policy, it’s a good opportunity for you to take stock. Compare the order quantity to your typical order size. If it seems a little higher than you’re comfortable taking on, look for ways to increase your sales to move the additional inventory. Maybe you can take advantage of the lower wholesale cost to adjust your own pricing or to make an attractive offer, like free shipping, that your customers won’t be able to resist. Maybe you can run a promotion or marketing campaign to boost sales. Show your supplier what you’re willing to do,
The Bottom Line About Minimum Order Quantities
Whether you are a wholesale seller or a retail vendor purchasing from one, the MOQ can have an impact on your business and your profitability. For wholesalers, setting a minimum order quantity can be a smart strategy for increasing order size and profits. MOQ means that your typical order value will rise, while your costs of doing business — production costs, staff time, shipping costs, and so on — will fall.
And if you’re a retail vendor who regularly orders from wholesalers or manufacturers, you’re certain to find yourself wanting to purchase from businesses that have set MOQ. Understanding MOQ and why vendors rely on them can help you negotiate a better deal for your business — a deal that you can pass on to your customers so you bring in more sales yourself.