Minimum Order Quantity (MOQ): What It Is, Benefits & Tips to Use It

If you're involved in logistics and supply chain, you've probably encountered a slew of industry acronyms like BOM, PO, and CRM. 

One more you should know is MOQ, short for minimum order quantity. 

Essentially, MOQ refers to the smallest number of units your company is willing to sell to a single customer in a single order.

Below, we’ll delve into what MOQ entails in greater detail, offering examples and providing the formula for calculating your MOQ. Additionally, we’ll offer quick tips on negotiating minimum order quantities with suppliers in a manner that benefits you.

Throughout this discussion, we'll explore why MOQ matters to both suppliers and buyers, revealing its potential benefits for both parties.

For instance, suppliers can enhance their profit margins (a concept we’ll delve into shortly). Meanwhile, buyers can leverage bulk purchasing to save money. Namely, some retailers offer lower prices per unit for larger orders compared to individual purchases.

TABLE OF CONTENTS:

• Understanding Minimum Order Quantity
• The Formula for Calculating Minimum Order Quantity: How to Determine MOQ in Four Steps
• Advantages of Minimum Order Quantity for Buyers and Suppliers
• Differences Between High and Low Minimum Order Quantities
• Comparison: Minimum Order Quantity (MOQ) vs. Economic Order Quantity (EOQ)
• Strategies for Negotiating Minimum Order Quantities
• MOQ conclusion

Understanding Minimum Order Quantity

Let's keep it succinct: MOQ refers to the smallest number of units a customer must buy for a business to process an order.

Wholesalers typically use MOQ because it allows them to capitalize on cost savings associated with bulk production and sales. By setting an MOQ, wholesalers ensure that fulfilling an order is economically viable. That usually necessitates the purchase of multiple units.

For example, if a business sets an MOQ of ten product units, customers must order at least ten units to fulfill the request. 

(These MOQ requirements are typically shown on the product order page, as demonstrated below.)

Each business determines its own MOQ, which varies based on factors such as product type and production costs.

Why does MOQ matter? Selling just one unit of a product is often unprofitable for a business.

For instance, customers who order only one T-shirt might pay $5.

Will $5 be enough to cover both production costs and fulfillment expenses? That includes processing, warehouse picking, packaging, and shipping.

Possibly not.

Thus, the business might set an MOQ of five T-shirts. In this scenario, the customer pays $25 (five T-shirts at $5 each), which is more likely to cover all associated costs and generate profit for the company.

The example emphasizes the importance of establishing your MOQ. It ensures you sell enough products per order to at least break even or, ideally, generate profit.

Example of Minimum Order Quantity

A practical illustration can clarify the concept of MOQ.

When purchasing wholesale items on eCommerce platforms such as Alibaba or AliExpress, you'll often encounter MOQ requirements.

For instance, if exploring dropshipping on Alibaba, you might notice that this sock wholesaler, for example, has an MOQ of 200 pairs:

They'll only fulfill your order if you meet the specified MOQ.

Here's another instance:

Here's another scenario: for a tote bag, the MOQ is one piece. However, if you opt for a customized logo, the minimum order requirement jumps to 800 pieces (as indicated under "Customization" at the bottom of the page).

In this case, incorporating a customized logo entails extra production time and cost for the supplier. So, the supplier may have decided that offering logo customization is only workable if the customer orders a minimum of 800 pieces.

But how exactly did they arrive at this minimum quantity? Keep reading — I'll detail how to calculate MOQ in the next section.

The Formula for Calculating Minimum Order Quantity: How to Determine MOQ in Four Steps

Now that you understand what MOQ entails, you're probably curious about how to determine your business's MOQ.

Before we delve into the process, it's essential to note that MOQ isn't a static figure. It's prone to change over time due to factors such as fluctuating consumer demand.

For instance, if your business specializes in Christmas decorations, you'll likely experience higher demand in early December compared to mid-March.

To ensure your MOQ remains relevant, you should establish a schedule for reassessing it, such as monthly or quarterly reviews.

Here's the method to calculate it:

Step 1: Predicting Demand

Forecasting demand involves estimating the total number of products your customers will request.

Unless you have a crystal ball, accurately predicting the exact number of product units ordered on a daily, weekly, monthly, or yearly basis is impossible.

Yet, demand forecasting enables you to estimate this quantity. It allows you to expect the required product stock to meet customer needs (which also aids in capacity planning).

The most effective approach to predicting the future is by examining the past. Analyze your sales data from prior years, breaking it down month by month to identify shifting demand patterns over time.

Future years are likely to exhibit comparable trends. For instance, if your business sells swimwear, you might notice an increase in demand during spring as people gear up for summer beach trips.

Consider this fictional company, Super Swimwear, LLC, as an example:

As evident from the data, there was a significant increase in units sold during the warmer months. If you're the owner of Super Swimwear, LLC, you might expect the busy summer season by increasing your stock levels.

Step 2: Determining Inventory Holding Expenses

Inventory holding involves storing inventory until it's ordered and shipped to customers.

Typically, there are expenses associated with inventory storage, known as inventory holding costs.

For instance, you may incur costs for renting warehouse space to store inventory, whether it's leasing a part of a warehouse or the entire facility.

For small business owners, storing inventory in a home garage may not include extra costs.

However, certain types of inventory can be more expensive to store than others. For instance, items requiring refrigeration will have extra electricity costs associated with cooling.

Imagine you're the owner of Super Swimwear, LLC. You've rented a small section in a shared warehouse to store your products, costing you $100 per month. That results in annual inventory holding costs of $1,200 ($100 x 12 months).

Yet, if your bikinis aren't selling quickly enough, you might need to rent an extra storage unit for extra stock. Renting on a month-by-month basis incurs a higher cost of $150 per month.

Suppose you've had to rent an extra storage unit twice in the year, totaling an extra $300 in inventory holding costs. So, your total inventory holding costs for the year amount to $1,500.

Step 3: Determining the Break-Even Point

The break-even point is the quantity of product units you must sell to cover all associated costs, resulting in neither profit nor loss.

These expenses may comprise:

1. Production costs needed for manufacturing the products. These include labor, raw materials, and consumable manufacturing supplies (e.g., energy to power machinery).
2. Order fulfillment costs. These involve picking products from warehouse shelves, product packaging, and shipping expenses (e.g., shipping labels and carrier rates).

Let's proceed with the example of Super Swimwear, LLC. To produce one bikini, labor costs amount to $25, raw materials and supplies cost $15, and order fulfillment expenses total $10.

When combined, labor, production, and fulfillment costs sum up to $50. So, you must sell a single bikini for $50 to break even.

Step 4: Establishing Your Minimum Order Quantity

After gathering the removed data, you can use it to aid in determining your MOQ. Let's proceed with the example of Super Swimwear, LLC.

Here's what you have:

• Demand increases during the warmer months.
• Your inventory holding costs amount to $100 per month or $1,200 annually, with an extra $300 incurred for extra storage, totaling $1,500.
• You should sell a single bikini for at least $50 to break even.

During periods of high demand, you might consider a lower MOQ since you anticipate rapid product turnover.

Conversely, in months with lower demand, increasing the MOQ could help offset expenses like shipping and packaging. It can also reduce the risk of excess inventory accumulation that necessitates extra storage unit fees.

Increasing your MOQ can also yield savings on each order. Here's how:

Suppose you set a minimum order of three bikinis per customer. With fulfillment costs including packaging and shipping, it totals $10 per bikini.

Packaging three bikinis together helps you save $20 ($10 for each of the two extra bikinis).

Now, when selling three bikinis in a single order, the total order value is $150, resulting in a profit of $20.

While this may seem modest, it accumulates rapidly. Selling just one combo pack of three bikinis daily translates to $140 in a week, $560 monthly, and $6,720 annually.

Advantages of Minimum Order Quantity for Buyers and Suppliers

MOQ offers benefits to both buyers and suppliers. It provides compelling advantages, making it a worthwhile arrangement for all parties involved.

Benefits of Minimum Order Quantity for Buyers

Buyers can benefit from MOQ in the following ways:

• Cost Savings: Like benefiting from "two for one" or "buy two, get the third free" deals, MOQs encourage bulk purchases, leading to cost savings. Buying larger quantities typically results in a lower cost per unit than individual purchases.
• Enhanced Supplier Relationships: Purchasing in bulk from suppliers can foster positive long-term relationships. For instance, buyers may negotiate MOQs with suppliers. They might split a large order among many buyers to meet the MOQ without accruing excess inventory.

Advantages of Minimum Order Quantity for Suppliers

While buyers enjoy savings due to MOQ, it might initially appear disadvantageous for suppliers. Yet, suppliers also reap benefits from MOQ.

Here's how suppliers benefit from MOQ:

• Reduced Inventory Costs. Selling products in bulk enables faster movement of larger quantities. That can lead to smaller warehouse requirements and decreased warehousing expenses. This, in turn, can lower inventory holding costs.
• Increased Sales Volume. Implementing MOQs eliminates the need to rely on many smaller buyers to buy individual products. Instead, bulk sales result in higher revenue from a single order, thereby boosting sales figures.
• Enhanced Cash Flow. Optimal cash flow management is crucial for covering operational expenses like labor and warehousing. The improved earnings associated with MOQs can contribute to a healthier cash flow.
• Profit Boost. A well-calculated MOQ strategy can elevate profits by maximizing revenue from product sales. It also minimizes expenses such as production and order fulfillment costs. For instance, the Super Swimwear, LLC example illustrates how selling items in bulk reduces per-order expenses, leaving more room for profit.

Differences Between High and Low Minimum Order Quantities

Low MOQ typically ranges from one to 50 units. 

It is typically associated with smaller startups in the industry, still in the process of identifying their target market. 

This lower MOQ helps attract customers who may be deterred by larger order requirements.

As the business expands and customer trust grows, the MOQ may increase.

Conversely, a high MOQ doesn't have a fixed number.

It is more suitable for established businesses with the resources and capacity to manage significant inventory levels for fulfilling large bulk orders. 

However, maintaining larger inventory levels includes higher expenses for warehousing, material handling, and associated labor costs.

Comparison: Minimum Order Quantity (MOQ) vs. Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) is closely related to MOQ discussions.

EOQ represents the optimal inventory quantity a business should purchase to minimize inventory holding costs, order costs, and shortage costs.

Shortage costs are incurred when a business lacks inventory in stock. For instance, rush manufacturing expenses may be incurred if a customer orders a product that's unavailable in stock, resulting in higher costs.

(Learn what causes backorders.)

You may also incur rush shipping costs to ensure timely delivery to the customer. For instance, overnight USPS shipping starts at $26.95.

Namely, MOQ refers to the minimum quantity of product your business requires a customer to order. EOQ pertains to the inventory quantity your business purchases to maintain in stock.

Determining the appropriate EOQ enables your company to fulfill consumer demand without encountering inventory shortages. It also mitigates the risk of inventory occupying warehouse space without being sold.

Slower-selling inventory is typically stored toward the rear of the warehouse. That makes it less accessible.

On the other hand, faster-selling inventory is positioned up front for quick access. This practice is known as the first in, first out (FIFO) method.

The EOQ formula considers factors such as demand, order costs, and holding costs.

While some of the dependencies involved in determining MOQ are also used in calculating EOQ, it's important to note that these are two distinct terms referring to different concepts.

Discover the ins and outs of EOQ and its calculation.

Strategies for Negotiating Minimum Order Quantities

If you operate an eCommerce store and collaborate with suppliers (like those depicted in the Alibaba screenshots), MOQ is crucial for your business's prosperity.

Why? It's essential to buy enough inventory without overcommitting, as excess stock can pose a risk of unsold inventory accumulation.

For instance, suppose you intend to buy baseball caps from a supplier with an MOQ of 500 pieces. You proceed to order 500 caps but encounter challenges in selling them.

You find yourself with 200 unsold caps, resulting in a large amount of wasted inventory and lost revenue.

Yet, imagine if you could engage in negotiations with the supplier to secure a lower MOQ.

Here are some strategies for negotiating MOQs with suppliers:

1. Material Negotiation. Let's say a product incorporates high-quality materials that increase production costs, leading to a higher MOQ. Then, inquire whether the supplier can substitute these materials with lower-cost alternatives to reduce the MOQ.
2. Collaborative Ordering. In instances where the MOQ is exceptionally high, such as exceeding 1,000 units, consider partnering with other buyers to meet the MOQ requirement collectively. By pooling resources and sharing costs and inventory, both parties can avoid over-commitment.
3. Focus on Popular Products. Emphasize orders for products with high demand, as suppliers often prioritize manufacturing these items in larger quantities. Manufacturers are more inclined to lower MOQs for popular products that have higher turnover rates. Inquire about the most frequently manufactured products to explore potential opportunities.
4. Partial Order Placement. Negotiate with suppliers to split large orders into multiple shipments. That allows you to pay for and receive a part of the inventory immediately and the rest at a later date. This approach ensures you have the necessary goods without overburdening warehouse space. It, in turn, facilitates more efficient business operations.

Establishing a strong existing relationship with a supplier can be helpful when negotiating their MOQ.

Why? Suppliers are often more willing to accommodate requests from long-term, trusted partners.

Having a history of reliability and timely payments enhances your negotiating position, as suppliers are keen to maintain your loyalty.

Understanding this dynamic can bolster your confidence during negotiations, empowering you to assert your needs and preferences effectively.

MOQ conclusion

Minimum order quantity (MOQ) represents the minimum number of units a business is willing to sell to a single customer in a single order.

There isn't a universal or optimal MOQ. It varies for each business and is determined based on factors such as customer demand, inventory holding costs, and the break-even point.

The factors used to calculate MOQ can also apply to the calculation of economic order quantity (EOQ).

However, EOQ differs from MOQ in that it represents the optimal inventory quantity a business should buy to cut inventory holding, shortage, and ordering-related costs.

It's important to note that the factors influencing both EOQ and MOQ can fluctuate over time, necessitating regular reassessment.

For instance, consumer demand for products like swimsuits or Christmas decorations may vary seasonally.

MOQ holds significance for several reasons. Suppliers use MOQ to mitigate inventory expenses, bolster sales performance, optimize cash flow, and potentially increase profits.

However, MOQ isn't solely helpful for suppliers. It also benefits buyers by enabling bulk purchases at reduced per-unit costs.

As a buyer, it's helpful to negotiate favorable MOQ terms.

We've discussed various strategies for negotiating favorable MOQ terms. These include proposing the use of lower-cost materials and collaborating with another buyer to divide large MOQ quantities.

This insight equips us with fundamental knowledge of MOQ, beneficial for both buyers and suppliers.