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MOQ, short for Minimum Order Quantity, is an essential part of doing business for some manufacturers, wholesalers, and suppliers. If you’re a business that produces goods or sells products, you must make the most out of MOQ since it can drastically change your bottom line.
Wondering the how’s and why’s?
In this article, we’ll dig deeper into the MOQ meaning, its importance, MOQ formula, examples, and more. So, let’s get started!
Feel free to read the sections in any order. Even better? Bookmark this blog to come back to it later.
» What does Minimum Order Quantity (MOQ) Mean?
As per the standard MOQ definition, minimum order quantity is the smallest (minimum) quantity of goods for a given product line suppliers intend to sell.
What’s interesting is, an MOQ can be in quantity or cost, depending upon the seller’s preference. In other words, you can either set your MOQ for a product in terms of pricing or the number of units. For example, $15,000 worth of goods or a minimum of 10 units.
The primary goal behind setting up a minimum order quantity is to make sure that each order you receive is worth every penny, time, and effort you invest in its fulfillment. Wondering how to set the right MOQ? While we’ll discuss that in detail later in the blog, the broad measures are production requirements, operational capability, process efficiency, and profit margin analysis.
» What is High Minimum Order Quantity (MOQ)?
As the term indicates, a high minimum order quantity means that the business has set a large quantity as its MOQ for a given product. Put simply, the business requires customers to order large quantities of products as a minimum requirement for their orders to be processed and fulfilled.
Wondering why businesses keep a high MOQ, though?
Suppliers, manufacturers, or wholesalers set up a higher MOQ due to certain scenarios that include the following:
Low margins for profit
With a low-profit margin, businesses sell goods in larger quantities to generate sufficient revenues.
High cost of production
A time-consuming or costly setup for manufacturing an item again lowers the profit margin, pushing the business to keep a high MOQ.
Increased cost for CA or customer acquisition
The cost of acquiring customers can go up for a business. With a high MOQ, these costs can be managed and help offset the otherwise low profitability.
Increased inventory cost
Setting a high MOQ allows businesses to control their inventory costs since the cost to hold more inventory is usually sky-high. Offering bulk-buying options enables manufacturers and suppliers to hold lower inventory, which, in turn, decreases their inventory costs.
Excessive administrative expenses
Although not talked about as much, admin expenses also affect your organization’s P&L statement. Keeping a high MOQ can help control these costs to a significant degree.
High shipment costs
Shipment costs are typically high, whether you have a flat fee model for a fleet or per container. With a high MOQ, it is possible to utilize the space and optimize this shipment cost.
» What is Low Minimum Order Quantity (MOQ)?
When a business sets a low minimum order quantity, it means that it is ready to sell its products in smaller units to customers. What’s interesting is that despite keeping their MOQ low, organizations are able to cover their production costs as well as make profits.
Let’s go through some ideal scenarios for businesses to go for a low MOQ:
- The margin for profits is high to facilitate a low minimum order quantity.
- The supply chain costs or the order fulfillment expenses, such as shipping charges, are low enough to keep the MOQ low.
- Vital costs, including production and administrative costs, are low, which, in turn, makes it affordable for businesses to keep a low MOQ.
- The business follows a make-to-order principle or has a limited range and custom-made products as its core offering.
- The business is D2C in nature, catering to customer orders directly.
» Why MOQ is So Important for Wholesaling & Manufacturing Businesses?
Minimum order quantity is a critical factor that determines the sales margin and cost efficiency of a business. In fact, it impacts a company’s profitability directly. Moreover, MOQ varies with the type of industry you’re in since every sector has its own rationale behind finalizing a practical MOQ.
Let’s say you’re a manufacturer. Your upfront cost of production runs will be a huge number. Now, unless you’re making enough money by selling those finished goods to cover these costs, it won’t be worth it. Products sold on tight or minimal margins may require you to sell a huge volume after deducting the overheads and other costs for breakevens. That, again, could adversely affect your business.
That’s the reason why manufacturers, suppliers, and wholesalers set up a minimum order quantity for their products. One shipment of 20 remote controls could be your MOQ, for instance. Sending single pieces of remotes to retailers would be so expensive, tricky, and tiring.
The MOQ of one shipment with 20 pieces, on the other hand, would save the additional cost of shipping, delivery, packaging, and labor, optimizing your operations and scope of revenues.
› Minimum Order Quantity Formula
We’ve covered the basics of MOQ so far. Great.
But how do we actually calculate an MOQ for a product?
The common formula businesses use to arrive at a feasible MOQ is as follows:
Minimum order quantity = total order cost/unit cost of production
However, this is not a set formula since it doesn’t consider multiple important factors, including annual holding cost, total unit purchases a year, and order costs for each purchase order.
Thus, the best way to go about setting a suitable MOQ for your business is to take time out for demand forecasting followed by break-even point calculation. It is also beneficial to carry out scenario planning, calculate volume discounts, and analyze inventory holding/carrying expenses. Based on these components, you can arrive at a practical lowest quantity of a given product that covers your costs while generating decent revenue to continue and grow your business.
Thankfully, many inventory management software systems simplify defining MOQ for you with their automated and accurate data. You get to access the crucial aspects, such as stock on hand, purchases, orders, and sales right in one place in real-time. That empowers you to define a reasonable MOQ for each product line to maximize profits.
› MOQ Examples
Businesses across industries worldwide use MOQ as a standard business practice. Interestingly, certain sectors tend to benefit more through MOQ, maximizing their scope of revenue. These businesses include the apparel industry, cosmetics sector, and food industry.
Think about it this way. Designing and making custom dresses or shirts would yield no or minimal profit if your cost is higher than your sales. Using a high-end commercial oven for a single half a kilo cake doesn’t make sense either. Or taking the trouble of formulating and creating an exclusive line of make-up won’t get you anywhere if your products aren’t protected with a definite MOQ.
Selling a single piece of cloth, make-up, or a food item won’t be worth the investment and effort you’ve put into the entire process - from ideation and research to production and market.
With minimum order quantity, you not only find a cover against the possible lost revenue but also ensure your time, money, and resources don’t go to waste.
» Components Affecting Your Minimum Order Quantity
As stated before, the minimum order quantity depends upon more than one aspect. If that wasn’t all, these factors are variable in nature which makes defining an MOQ even more complicated.
Let’s take a look at the components that directly affect MOQ:
1) Data
Maintaining precise records of the goods produced and sold is critical to deciding an optimal MOQ. Start collating and assessing this data if you’re not already doing so.
2) Supplier cost
From material, procurement, and equipment costs to labor and shipping expenses, you must have clarity on your supplier expenditure for a practical MOQ figure.
3) Warehouse cost
The expense to carry the inventory impacts your order fulfillment capacity and profitability significantly. This includes costs such as labor, insurance, and warehousing. Track these costs to set the right MOQ.
4) Consumer demand
The ability to analyze and forecast accurate customer demand is key to producing, holding, and selling the goods. At the same time, it is vital for defining a feasible MOQ level. Imagine your MOQ being so high that no one buys it. Or so low that you can’t break even.
5) Fluctuations
Whether it’s changing market demands, trends, or suppliers modifying their own pricing and MOQ strategies, all of it is going to impact your budget and MOQ limits. Besides, a change in compliance can also force you to rethink your typical MOQ levels.
6) Technology
While technology can turn things smoother when it comes to data collection and analysis, it makes sense to use the latest Data Analysis Software so that you can get the most accurate and authentic data at all times. It is the data you’re resorting to for setting your MOQ, after all.
7) External factors
From natural disasters to extreme weather to a pandemic, all of it can dramatically affect an otherwise normal demand and supply operation. That can not only impact your MOQ and pricing but also overall procurement, production, and fulfillment costs.
» Final Thoughts
The minimum order quantity (MOQ) plays a significant role for businesses that are into producing and selling goods. It can help ensure each order is worth the time you put into its production or fulfillment. That every expense you make toward it and resources you use is worth it. It can help you optimize your costs, profitability, and future business strategies for growth. Since many inventory management tools offer order tracking and MOQ calculations, maintaining a healthy inventory and supply chain operations becomes smoother and more streamlined.
