- Backordering: What It Is And How To Do It Right
- How To Calculate Stockout Costs & Tips To Avoid Running Out of Stock
- What Is The Stock Replenishment Process & Why Is It Important?
- How To Calculate And Maintain Optimal Inventory Levels
- What Is Order Lead Time? 5 Tips To Shorten Purchase Order Lead Times
- Safety Stock Guide: Formulas, Purposes & Examples
- Minimum Order Quantity Explained & How To Set The Right MOQ Price
Minimum Order Quantity Explained & How To Set The Right MOQ Price
Minimum order quantities used to be something only suppliers and manufacturers required. Now, ecommerce brands are implementing MOQs too.
You can't sell your way out of trouble. Not if your prices don't cover the costs of goods sold (COGS). And unless you know what you spend on materials, production, and distribution, you can sell all of your products and not make a profit. Stay there too long, and you may near the worst-case scenario: going out of business.
That's where MOQs come in. AKA the business practice that ensures every sale you make is profitable.
Let's break down what exactly MOQs are, how to negotiate your supplier's MOQs down, and when it makes sense to implement an MOQ for your ecommerce brand.
What is MOQ?
MOQ stands for minimum order quantity and is the minimum amount of product a seller, supplier, or manufacturer requires a customer to purchase based on units or price. For example, one supplier might set an MOQ of 100 units, while another might require an MOQ price of $1,000+ on purchase orders.
By implementing minimum order quantity (MOQ) policies, companies ensure their economies of scale and keep their unit economics in good standing.
In other words, businesses set MOQs to cover operational costs. Your brand's operations keep you in business, but operating efficiently often comes with a high price. MOQs ensure that you can more than afford that number without sacrificing quality.
Minimum order quantities are particularly useful when things go wrong. For example, when the 2020 pandemic led to unprecedented supply chain issues, it also exacerbated poor operational practices and faulty profit margins that a lot of ecommerce brands were running with.
As a result, running out of capital (the summation of poor operations and faulty margins) became the #1 reason brands went out of business in 2021. Unfortunately for many of these brands, setting MOQs could have kept them out of trouble, despite the unexpected challenges.
Minimum order quantity example
Ever heard of Maple? Probably not. Despite fundraising $26M, this NYC-based start-up offering chef-prepared meals closed up shop in 2018, after only three years.
They intended to provide quality meals at a reasonable price. But Maple relied on funding to cover operational costs from the start. Expensive ingredients, production expenses, and delivery fees burned through these funds. By the time they increased minimum order quantities to compensate for their costs, it was too late.
That's because a seemingly simple service can be surprisingly complex (and expensive) to offer. A fresh plate delivered at your door, for example, entails ingredients, a kitchen, plating, and delivery.
Let's assume a vendor like Maple sells a chef-prepared "Spring" dish at $20 per unit. The ingredients for this dish cost $12.50 to make. At first, it may seem that a small order isn't a big deal. But let's zoom out for a moment.
Each dish includes a specific set of organic ingredients (that may fluctuate or perish quickly), packaging, and personnel. Add those costs together, and you're well over your $20 sale, and you haven't gotten to your delivery fee. Additional issues come from pricy ingredients that may go unused. This is what put Maple in the red.
No business idea is impossible, but you need a realistic operating model for these ideas to succeed. Take CookUnity, for example. Similar to Maple, it offers chef-prepared meals to consumers. However, this brand reduced its costs by:
- Sourcing independent chefs to prepare meals. This keeps operations decentralized and expenses low.
- Delivering meals cold, ready for reheating, so time constraints aren't as strict. This further lowers operating costs.
- Requiring customers to choose from a selection of subscription plans that work best for their lifestyle. Each subscription plan already considers the MOQ of operating within the customer's zip code.
As a result, CookUnity continues to run a profitable and sustainable business five years after launching. That's because, unlike Maple, CookUnity offers flexibility to consumers within a range of feasible options, so they're not spending more than they're making.
High MOQ vs. low MOQ
A low MOQ refers to a minimum order quantity of one to 50 units per order. While not always profitable, a low MOQ creates a lower barrier for customers, making it more likely they'll complete the transaction and buy from you again.
Meanwhile, a high MOQ refers to minimum order quantities of 50 or more units. And while a high MOQ is more likely to generate profits, it'll also keep many customers from buying from you.
Let's quickly break down the pros and cons of both types of MOQ:
|High MOQ||Low MOQ|
|Ties up more working capital in unsold inventory||Ties up less working capital in unsold inventory|
|More inventory means higher storages costs||Less inventory means lower storage costs|
|More product in storage allows for faster fulfillment||Less inventory leads to a higher risk of stockouts and, in turn, longer lead times|
|Typically requires a larger workforce to manage||Typically requires a smaller workforce to manage|
|Potential expiration dates on products could lead to more dead stock||Faster turnover means a lower risk of collecting dead stock|
So, which one's better: a high MOQ or a low MOQ? Like most things, it depends on your industry and how much product you move.
For example, manufacturers who partner with smaller start-ups typically implement lower MOQs. And they'll provide less inventory to more customers. Meanwhile, manufacturers that provide for top-tier conglomerates typically implement higher MOQs and provide more inventory to fewer customers.
When it comes to deciding how high or low your MOQ should be, there are two factors you should focus on:
- Inventory turnover, or how often your inventory is replenished in a period, usually one year. The greater your turnover, the higher you can push your MOQ.
- Production costs. If your operating costs are steep, a higher MOQ can increase your profit margins and free up more working capital for your brand.
MOQ vs. EOQ
Economic order quantity (EOQ) is the ideal amount of inventory a business should order to minimize ordering, receiving, and holding costs. And it gives you insights into how much inventory is a healthy amount for the company.
By calculating your EOQ, you can prevent:
- Stockouts (not enough inventory to fulfill the order)
- Dead stock (way more inventory than you are selling)
Not to mention EOQ is a key consideration when calculating an MOQ that will keep your business profitable. Without it, an MOQ can drive companies to purchase more inventory than they need at one time, leaving them nowhere near their EOQ.
To calculate EOQ, use the following formula:
EOQ = the square root of: [2(Setup costs)(Demand rate)] / Holding costs
Why do suppliers & manufacturers set MOQs?
Like any other business, manufacturers and suppliers do whatever makes sense to optimize their long-term viability. Usually, this depends on their production and size order. But by implementing MOQ policies, manufacturers and suppliers ensure economies of scale and keep their unit economics in good standing.
Depending on your manufacturer or supplier, these MOQs can be high–sometimes too high for your business to justify. But it's typically a lot easier and cheaper to negotiate these terms down than to find a new manufacturer or supplier.
And you'll get a lot farther in these negotiations if you can offer one thing: predictability. Specifically, predictable order sizes and frequency.
Negotiating better terms with manufacturers
By telling your manufacturers approximately when you'll put in your next PO and how big it should be, your manufacturer can ensure availability in their production schedule. (Plus, your team can plan activities like marketing events because you'll know what's coming and when.)
For example, try building a 12-month operational plan (Cogsy can help you do this and build accurate production orders). Then, share this plan with your supplier or manufacturer and commit to fulfilling a minimum number of those POs with them. You can even outline the rough timeline for when you'll place these orders for some additional insurance.
This way, you're providing your manufacturers the predictability they want with minimal commitment. Often, this is the closest a manufacturer gets to recurring revenue, even 12 months out. So, you can then leverage this predictability to negotiate better vendor contract terms based on the total minimum volume you'll be ordering within the year.
However, even in the best cases, you typically can't negotiate MOQs down. That's because manufacturers have strict limits on the minimum quantities to ensure profitability.
But if you're in good standing with this manufacturer, you can sometimes earn the option to place smaller production runs more frequently. This way, you're fulfilling their MOQ requirement without getting all that inventory at once.
Not to mention it keeps your holding costs down and lets you fulfill products faster. And it provides a massive advantage over competitors, especially when supply chains are disrupted, or customer demand surges unexpectedly.
Can’t negotiate better vendor terms? You might want to look into finding a different supplier. One with a lower minimum order quantity that better aligns with your brand’s needs.
Should ecommerce brands require MOQs?
Traditionally, only suppliers and manufacturers benefitted from MOQs. But recently, ecommerce brands have started reevaluating how they can leverage minimum order quantities to their advantage.
For example, MOQs mean larger orders and higher average order value (AOV). And when done right, they can leave your business with working capital to grow the brand.
But admittedly, imposing this minimum order quantity on your customers can be a hard sell. Luckily, it doesn't have to be so direct. Instead, try incentivizing customers to reach an optional MOQ for added benefits.
Remember how CookUnity masks MOQ with subscription tiers in the example above? That's a perfect example of how an ecommerce brand is doing this.
Similarly, Packwire, a custom box manufacturer, invites customers to see how their order size impacts per unit pricing using an interactive widget. This widget brilliantly and quickly justifies Packwire's MOQ. And it does it by empowering customers to decide the final, most optimal order quantity and price per unit, depending on which box they buy.
However, perhaps the most common practice is using MOQs to incentivize customers to buy more. For example, underwear leader Victoria's Secret offers five pairs of underwear for a discounted $35 (a $62.50 value). Plus, they'll waive shipping fees on orders over $50.
Combined, these strategies distract customers from the unwanted minimum order quantity. And it does it in a way that:
- Increases the brand's average order value (AOV) by encouraging customers to reach that free shipping minimum
- Accelerates inventory velocity (why not unlock a discount while you're at it?).
But if you only want to implement one strategy, go for the minimum order quantity to unlock free shipping. This typically is the easier sell and best way for ecommerce brands to implement MOQs that don't feel like MOQs.
Why? Because consumers hate shipping fees. In fact, 58% of US consumers will abandon their carts if they have to pay for shipping.
And 60% of ecommerce brands found that offering "free shipping with conditions" was a great marketing tool for overcoming this cart abandonment.
How to calculate your MOQ as a DTC brand
Calculating your MOQ starts with knowing what each unit costs you in raw materials, production, and distribution. And when you consider your operational and financial data, you can land on a minimum order quantity to combat market fluctuations.
Here are three questions that'll lay the groundwork for finding your brand's ideal minimum order quantity:
1. What is your forecasted demand?
As a business, you need to know how much demand you actually have for your products. That way, you can proactively prepare to fulfill that demand.
Historically, brands used spreadsheets to forecast demand. They'd plug-in data that was already outdated. Then, they'd predict demand for a specific moment in time (again, outdated), then wash and repeat. The whole process was tedious and time-consuming. And the question brands had to ask wasn't if the inventory forecast in Excel was off but by how much ?
Cogsy's demand forecasting tool uses real-time information from the tools your brand relies on to automate this task. As a result, these forecasts provide radically more accurate insights into how much inventory you need to order and when.
For one, this forecast provides insights into what a reasonable MOQ looks like from your customer's perspective. For example, if most people buy two items from your store on average, they might not respond well to a six-item MOQ.
Accurate ecommerce forecast also ensures you have enough inventory on-hand to fulfill the minimum order quantity for each customer.
And lastly, with this information, you can check that your MOQ doesn’t negatively impact your forecasted demand. If it does, your MOQ might be too high or this strategy might not be right for your brand.
2. What is your break-even point?
Your break-even point (BEP) is when the total revenue generated and costs are equal. In other words, it's the point where your business garners no gains or losses.
Because of this, a break-even point analysis is critical because it tells you how many sales need to happen before your online store can start making a profit. And it informs your production targets, sales targets, and sales mix.
To calculate your break-even point, use the following formula:
Break-even point = Fixed costs / Contribution margin
By knowing your break-even point and demand, you can make an educated guess on how much each customer needs to order for you to, well, break even. This will give you insights into the lowest your MOQ can be.
3. What are your holding costs?
Warehouse space has always been limited. But with the recent warehouse shortages, storage space is harder to come by and more expensive than ever.
So, before you set your MOQ, you need to consider:
- If you have space for the product, you'll need to fulfill those larger orders
- The turnover rate of any product you're putting an MOQ on
And one way to do this is by calculating your economic order quantity. That way, you implement an MOQ that is actually profitable and that your brand can afford.
What do I mean by this?
When setting an MOQ, you need to have more product on-hand to fulfill those larger orders. But too much stock on hand costs your business big. That's because the longer this inventory sits in the warehouse, the higher your holding costs and, consequently, the lower your margins are.
So, the best rule of thumb is to start with a low MOQ--especially if your holdings costs are already high. You can always test higher MOQs that align with your economic order quantity, assuming that the first low MOQ performs well.
Pinpointing your ideal minimum quantity order
Before you officially implement an MOQ, use the answer to these questions to find a number that meets the following criteria:
- It is slightly above your average order value, and it outperforms your historical, non-MOQ influenced AOV. If it doesn't do the latter, try lowering the MOQ slightly.
- Your manufacturers and suppliers can fulfill the new demand without harming your relationship. Keeping these parties in the loop about how your MOQ will affect future purchase orders is the best place to start.
- This number aligns with your economic order quantity. Meaning, it won't wreck your margins by creating unnecessary holding costs that make your products no longer profitable.
You're probably thinking that this is a lot to go through. And you're right--it is. But the goal is to find an MOQ that is responsible for your business and reasonable for your customer.
How to set your MOQ on Shopify
When you find that reasonable and responsible MOQ, setting it up on your Shopify store is easy. Simply head to your admin page, then:
- Open the wholesale channel
- Click "Preferences"
- Select "Set a minimum purchase"
- Enter your MOQ (match or exceed) for wholesale draft orders
Cogsy makes managing MOQs easy
Making sure minimum order quantities work in your brand's favor comes down to having access to real-time operational data. That way, you can give your manufacturers the predictability they want. And you can ensure that your MOQ and the inventory levels you need to support it aren't unknowingly hurting your bottom line.
The ops optimization tool Cogsy pulls your real-time data into one single source of truth. Then, it gives you insights into how you can make this data work in your favor by creating:
- Accurate demand forecasts using real-time inventory levels and past trends (feel free to share these with your manufacturers).
- Optimized POs (all you have to do is check and submit) with automatic replenish alerts, so you only order what will sell.
- Sustainable operational plans to hit your most audacious revenue goals (with the power to effortlessly pivot when needed).
To learn more about how Cogsy can help you manage MOQs and reach operational excellence, get in touch with the Cogsy team today.
More of a DIY type? Well, one article really isn't enough to master operational excellence. So, learn more in-depth strategies by downloading our free Ultimate Guide to Optimizing Retail Operations in 2022.
Minimum order quantity FAQs
What is MOQ pricing?
The MOQ price is the minimum dollar amount a customer has to spend on their order. It can ensure cost effective sales and improve the cash flow in your ecommerce business. Small business owners generally sell small quantities with low MOQs, while wholesale suppliers can require large quantities or higher prices.
How is MOQ calculated?
While there is no formula for the right MOQ price, the ideal MOQ for a business is calculated based on forecasted demand, break-even point and holding costs. It should be slightly above average order value and reasonably priced to not harm any customer relationships.