June 15, 2022
Minimum Order Quantity (MOQ) is the fewest number of units that a business wants to sell to a customer at one time. Most manufacturers and suppliers impose an MOQ as a means of encouraging eCommerce sellers to purchase enough goods for production to be profitable. However, online retailers can apply an MOQ to different types of orders. It’s why you can only buy a multipack of canned soft drinks online in some instances, as opposed to a single can.
As an example, a supplier may have an MOQ of 1,000 units, meaning an online retailer can buy no less than 1,000 units of inventory at a time. The challenge for the retailer is that their ideal unit count or reorder quantity may not match the supplier’s MOQ. Similarly, an eCommerce brand may have an MOQ threshold for their B2B orders, where they require a minimum of 100 units or £500 worth of product to be purchased at once for the sale to be worthwhile for the brand.
For suppliers, the MOQ they set depends on the product, production process, factory capacity, industry competition, and other factors. As such, MOQs can differ significantly between suppliers and industries but are usually defined by units or price. Third-party logistics (3PL) providers can use MOQ to define the minimum number of orders a client has to ship per day to access the best eCommerce fulfilment prices and to achieve economies of scale.
eCommerce businesses ultimately want to purchase goods from a supplier at an MOQ that enables them to sell these products at a sustainable profit. High MOQs often require a large capital outlay from the eCommerce brand, who must also finance the storage of the products they purchase. Customer demand for these items may decline, which would incur higher storage costs. This can stifle the growth and development of the business, as the majority of its cashflow would be tied up in slow-moving stock.
As an eCommerce brand, it’s important to work with your supplier to agree an MOQ that works for both parties. Driving costs down to achieve the lowest possible MOQ may be beneficial for your business in the short-term but could hurt your supplier in the long run, with the impact coming back to bite you if they supply your bestselling products. Calculating your own MOQ is useful in order to know how much product your business can profitably purchase.
Calculating your MOQ is a key part of inventory management. However, there is no single correct MOQ or fixed formulaic approach. This is because the requirements vary by business, and there is often a trade-off between having a higher MOQ or paying a higher price per unit. Nevertheless, the steps below can help you work out the ideal MOQ for your eCommerce business:
Demand forecasts can often influence the decision-making process behind inventory purchasing. You can use inventory management software like Zendportal and its intuitive Inventory Analysis feature to implement demand forecasting, which is typically based on product type, competition, seasonality, and other factors.
You may find that your supplier’s MOQ isn’t far from what you are estimated to sell. Remember to account for the total timeline required to ship and stock the products, including lead times, freight transit times, the goods receiving process with your 3PL fulfilment provider, and other potential delays, as you might need to order stock sooner than anticipated.
Here are a few tips on monitoring demand, especially during unstable times:
The storage fee will differ for every product, as it factors in the size of the product, any specialist requirements (e.g. refrigeration), how much time it spends in storage, and associated labour and overhead costs. Given the fast-paced nature of selling online, eCommerce businesses generally try to avoid holding inventory for longer than necessary (after all, this is capital sitting on a warehouse shelf).
You should be aware that your inventory holding cost is the true cost of storing all of your products and should be carefully considered before you invest heavily into inventory.
Put simply, your BEP is the number of products you need to sell in order to cover the cost of purchasing the stock from your supplier. In the case of B2B sales, consider what the lowest per-unit GPB/dollar amount that you are willing to charge in exchange for a higher order value. It cannot be so low that your profit margins are almost negligible, but volume discounts are expected if you’re not paying for smaller quantities at a higher price.
Having worked out the steps above, you are now ready to calculate your MOQ. Let’s say that you consistently experience high demand from your B2B customers. They purchase 500 units per order on average, and you need to sell at least 420 units per order to turn a profit. If your sales performance data indicates that your B2B customers have placed 500-unit orders in the past, you could set 500 units as your MOQ, or even reduce this down to 420 units.
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In some cases, you might not be able to find a supplier that offers your preferred MOQ. Here are some actions you can take to secure a favourable deal:
Depending on the supplier you wish to work with, you can negotiate with them to give you a more favourable MOQ. It can be difficult to get manufacturers to accede to your terms, as they ultimately set their MOQ to produce goods profitably. However, some suppliers might be willing to accommodate your request, especially if your eCommerce business has an established relationship with them.
You can offer customers the chance to pre-pay for your products. One way to do this is by conducting a crowdfunding campaign to attract customers and raise the funds needed to meet the MOQ of your preferred supplier.
Depending on what you sell, you can negotiate with manufacturers to replace certain parts of your product(s) with those made from more affordable materials. This should help reduce the cost of producing the items and, by extension, the MOQ. However, be careful of compromising the quality of the final product due to cost-cutting exercises, as this can adversely affect your business in the form of unhappy customers.
Building strong, amicable relationships with your supplier(s) can be extremely beneficial to your eCommerce business in the long-term. This gives you the power to negotiate more favourable terms, especially when it comes to MOQs. Consistently positive business performance on your part can further strengthen supplier relationships.
One way to save on inventory costs while fulfilling a supplier’s MOQ is by having products delivered at different times.
For some eCommerce brands that sell on Shopify or other platforms, MOQs can be more beneficial than buying a smaller batch of inventory at a higher per-unit cost. This is particularly true when you factor in the higher average cost over time, as well as the shipping costs to account for the increased frequency of reorders. The ideal MOQ will vary across businesses and determining the right benchmark requires research, careful demand planning, and no small degree of luck. Finding an MOQ that works for you can help your business scale whilst ensuring you remain profitable.
Get in touch to find out how Zendbox can help your eCommerce business with storage, inventory management, and much more with a premium order fulfilment service.
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