Minimum Order Quantity: How to Calculate MOQ for Business and Tips

Introduction

Proper inventory management is one of the trickiest parts of running an ecommerce business. Over the years, retailers have appointed several inventory storage methods to ensure quick turnover and minimal wastage. One such method, hugely popular among suppliers and manufacturers, is the Minimum Order Quantity (MOQ). 

Until some time ago, MOQ was generally used by wholesalers and importers to sell to retailers. However, of late, many ecommerce vendors too have started this practice. Many of you must have already come across things like ‘free shipping above $100’ while shopping online.

In this post, we look deeper into what MOQs are, whether they are useful for a business, and how to set one for your store. Stay tuned!

What is a Minimum Order Quantity?

Minimum Order Quantity refers to the least amount of items someone can buy from a business. It could also be set on minimum order values. For example, let’s say you are a distributor of ceiling fans who only accept purchase orders of a minimum of 10 units or ones that cost above $500. The reason to do that is to reduce losses and protect profit margins. 

Shipping, production, and other logistics costs can pile up, resulting in an eventual loss for companies. With an MOQ, owners know just how much they’ll be making with every order. It’s a smart move, but it can also feel restrictive to customers. This is why we’ll be sharing some surefire ways to include MOQs without turning away customers. Before that, let’s find out how to decide what your MOQ should be. 

How to Calculate MOQ?

The correct MOQ for any business is the minimum cost or order quantity it needs to make a profit on every sale. Figuring out that number depends entirely on finding out the nitty-gritty of how your business operates.

1) Anticipate Demand

Determining how many items you’ll need till your reorder point is crucial in determining your MOQ. One of the goals of MOQ is faster inventory turnover to keep prices current and save up on holding costs. Therefore, it’s important you forecast demand accurately to avoid higher or lower than required stock units. 

Additionally, factor in the time spent on production and shipping. How long do suppliers/manufacturers take to ship your merchandise? Can they expedite manufacturing and shipping if you suddenly run short on bestsellers? Having clear answers to these questions will help you make safer decisions.

2) Calculate Your Cash Flow-Positive Mark

A business is said to have reached its cash flow-positive or break-even point when it starts making more money than it invests. To figure out your break-even point, you’ll need to determine how many items you need to sell or how much revenue you must make per sale to stay profitable.

When calculating your business expenses, be sure to include warehouse management costs, staff salaries, carrier integration prices, etc.

3) Understand Inventory Carrying Costs

Holding or inventory carrying cost is the expense made by any business to maintain inventory. These include overhead expenses such as rent, electricity bills, labor charges, etc. 

Your holding costs depend on what your inventory management strategy is, for example, FIFO (First In, First Out) or LIFO (Last In First Out). Accurately calculating carrying costs will help you find out your ideal MOQ.

Once you’ve finalized all the numbers it’ll be easy to set an accurate MOQ and always stay profitable with every order. Even though it ensures successful business operations, many ecommerce businesses are wary of putting up MOQs. Below, we’ll find how this strategy helps retailers and how to establish it for increased customer satisfaction.

4 Key Benefits of Requiring a Minimum Order Quantity for Ecommerce Retailers

MOQ brings guaranteed rewards for all online sellers. Let’s look at some of the top benefits it offers.

1) Improved Cash Flow

Setting a minimum order quantity can be beneficial for both sellers and buyers. For a vendor, it means lesser working capital tied up in unsold or dead stock and, therefore, financial availability to invest in more products. For customers, it translates into bulk buying advantages like lower product and shipping prices. 

2) Optimum Stock Levels

An accurately measured MOQ should save your business from mismanaged inventory with well-defined reorder points. Every ecommerce company wants to clear out inventory as fast as possible, but that’s not always the case. MOQs bring store owners one step closer to that reality with estimated stocks and sales.

3) Increased Profits

The success of MOQs lies in the understanding of supply and demand. When estimating the minimum order quantity, businesses are not guessing what their annual or quarterly sales will be. They are almost sure of the numbers because they know their market so well. In this scenario, MOQs help generate more revenue and assured profit margins than any other business model.

4) Lower Shipping Costs

Bulk shipping usually costs much less than shipping in small batches. With an MOQ set on 50 or 100 units or even an order amount, you’ll be moving many items at once. This makes online businesses eligible for several discounts on shipping with the best carriers like FedEx, UPS, DHL, USPS, etc. 

5 MOQ Best Practices Every Online Store Must Follow For Maximum Profit

Now that you’ve set your mind on trying out MOQ for your company, it’s time to learn about the best ways to do it. 

1) Encourage Higher AOVs 

At first, customers already familiar with your store may be surprised by or even wary of the new MOQ. To ease them in, try out bundling or kitting to increase the average order value (AOV). For example, sell a pack of 3 t-shirts for $90 instead of $40 each. 

Or you could urge customers to buy more with a free shipping offer on a minimum order value. To further enrich their experience, showcase featured products in accordance with their previous buys or offer free gifts on a minimum spend.

2) Eliminate Slow-Moving SKUs with Flash Sales

Sales are the fastest and easiest way to move items that seem to never fully clear out. Think of older stock or products your customers didn’t take to. Seasonal, holiday, or Black Friday sales are great for freeing up that working capital. And with a fixed MOQ, you’ll be selling more items than you previously did. 

3) Boost Inventory Turnover with Attractive Pricing

The MOQ method only works if your products are priced correctly. Keep your prices competitive but never too high. Moreover, the margins provided by the MOQ should allow you to lower your prices a little to bring in more customers. Similarly, a very high MOQ value would also discourage shoppers from completing their purchases. 

4) Weed Out Casual Customers

It seems appalling, but not all customers are made the same. Technically, a business would want to welcome as many shoppers as possible (new or old) for long-term success. But remember, customer acquisition is costly. If your store receives more casual customers or bargain hunters than recurring ones, then you may not be making as much profit as you like. 

Repeat customers are the backbone of all successful ecommerce ventures, and they bring in 10x more value in their purchases following the first buy. Therefore, even if setting an MOQ feels counterproductive for immediate goals, it will pay off in the long run by creating a pool of loyal customers.

5) Invest in a Good Inventory Management System

Since proper inventory management is a huge part of successfully implementing the MOQ strategy, it’s important to seal all loopholes. That means maximizing efficiency and reducing human error by opting for an inventory management or warehouse management system. 

As you add more products to your offering, inventory management software can help set up reorder points and notify you of depleting stock levels. It can also help you identify bestsellers, slow-moving stock and better understand demand. Lastly, it ensures orders are delivered correctly and on time.

Conclusion

We hope by now you have a clear understanding of what a minimum order quantity is and whether it is the right move for your business. If you are a dropshipper or supplier in the ecommerce sphere, including an MOQ is extra helpful. Ecommerce retailers too can include it safely if they know the ins and outs of their business. Only you have the power to decide what’s right for your business. All the best in your endeavors!

FAQs

1) Which ecommerce companies should set a Minimum Order Quantity?

Any ecommerce business owner or supplier who wants a fixed quantifiable revenue from every sale must set a minimum order quantity. The objective of MOQs is ensuring sales margins remain intact despite the number of orders. A business that does not want to store inventory for long periods of time can also look into fixing an MOQ.

2) Does MOQ protect businesses against losses?

Yes, MOQs always ensure businesses stay profitable with every sale. However, there are more ways in which MOQs help, like balancing inventory levels so as to never face stock outs or dead stock, saving up on freight and administrative costs, and maintaining better cash flow.