Minimum Order Quantity: How to Calculate MOQ for Your Business

If you’re a business owner, you probably hear neverending opinions on how to best run your business. Some of these opinions can be pretty controversial. Take minimum order quantities, for example. Depending on which side you’re on and your circumstances, you can either love MOQs, or you can hate them. 

We are going to let you decide for yourself by breaking it all down for you. So read on for a comprehensive guide on minimum order quantities and order management in general, why you may want to use them, and how to calculate them for your business. Moreover, you can find out here how to deal with a delivery exception.

What Is a Minimum Order Quantity?

A minimum order quantity, or MOQ, is the lowest number of items that a supplier is willing to sell at a specific price. This is a common requirement set by suppliers or even wholesalers that are looking to maintain profitability when they run or sell orders. 

Minimum order quantity can refer to a specific quantity of items; for example, you have to order 1,000 units. Minimum order quantity can also refer to a specific dollar amount of products that you have to purchase; for example, you have to spend $1,000. If your orders are below these amounts, they will not go through. 

Why Do Suppliers Use Minimum Order Quantities?

Businesses don’t do anything without a reason, and most of the time, this reason comes down to money. Simply stated, suppliers and wholesalers use minimum order quantities so that they can offer competitive pricing. This is because when you buy or order in bulk, you get a discount. Just think about the advantages of shopping at Costco! It’s essentially the same concept, which means that a minimum order quantity might end up saving you money, too. 

Additionally, minimum order quantities allow suppliers and manufacturers to get rid of larger amounts of inventory. This helps cut down on holding costs that can add up quickly in terms of storage. Also, by keeping up with your finished goods inventory, and with having a backorder policy, you can effectively monitor your business.

For example, say that a supplier maintains about 10,000 units on hand -- they are paying to store those 10,000 units -- and that’s not cheap! So instead of waiting for each item to be sold individually, which would take longer and end up costing them more money, they set an MOQ of 500 units so that they can get rid of 1/20 of their inventory in one fell swoop and keep costs low for the customers. 

How to Handle Minimum Order Quantities as a Buyer

While they may sound limiting, a minimum order quantity can actually help you out. So how can you deal with this if you love the company, love the products, but aren’t able or willing to meet the minimum? Here are some steps that you can take to conquer minimum order quantities like a champ:

• Keep in mind that some suppliers offer a volume discount baked into the overall price. If you’re ordering in bulk, you’re likely actually getting a better price on your boxes than if you placed a smaller order. Plus, it’s not like your boxes are perishable. In fact, they’re made to last! Companies like BoxGenie use MOQs to keep prices down for customers and to maximize productivity for their team—it’s a win-win.
  
  
• Keep an eye out for discounts. For example, BoxGenie provides new customers with a coupon code that brings down the price on your order even further, so once you’re satisfied with the quality, you’ll be fine with ordering more boxes in the future.

How to Calculate a Minimum Order Quantity

So you’re intrigued by the idea of setting a minimum order quantity for your business, but how can you figure out what quantity to set? As it turns out, there’s actually a way to calculate an ideal amount that will work for your business. That way, you don’t have to just guess or pick a random number only to have to tweak it later on, which can cause a lot of confusion for your buyers. 

Here are the steps to follow to calculate a minimum order quantity:

1. Determine the demand for your products. In an ideal world, demand would be constant. However, that’s not necessarily the case. Thankfully, there are demand forecasting tools that you can use to better predict your demand. You don’t want to place an MOQ that’s totally out of line with your demand -- no one will want to purchase that much, and you’ll end up with nothing. Instead, utilize average order quantities in the past to get an indication of what buyers are actually willing to purchase. 
   
   
2. Know your break-even point. Obviously, the whole point of setting an MOQ is to remain profitable. So when you set this number, you need to base it on your break-even point. Keep in mind that people will often expect volume discounts, so you have to be comfortable with selling a single unit for a lower cost than you usually would in exchange for selling more units at a time. 
   
   
3. Calculate your holding costs. An extra cost that you might not initially consider is your holding cost, or how much it costs for you to store your items. This amount should be added to your break-even amount to ensure that you don’t unintentionally end up losing money. This is especially true if your items are particularly expensive to store, whether it’s due to things like climate control requirements for perishable items or space issues for extremely large items.  
   
   
4. Choose your minimum order quantity. With all these factors in mind, you can come up with your MOQ amount. If you’re stuck between two different numbers, you might want to try out the lower one first to see how people respond. This is safer than choosing the higher number only to find that people aren’t willing to purchase that quantity. From there, you can always increase your MOQ if you find that your demand is high enough. 

How to Effectively Manage Minimum Order Quantities as a Seller

Once you have calculated your ideal MOQ, there are some additional considerations that you need to keep in mind as a seller to ensure that this effort is successful and you actually end up getting orders in despite this minimum. 

• Advertise volume discounts so that the buyer doesn’t feel like they’re not benefitting at all from ordering a higher amount. Show that it’s a win-win scenario that will help both you and them save money in the long run. 
  
  
• Offer free and fast shipping or flat rate shipping with their orders so that they don’t have to worry about spending a fortune on this cost thanks to the high order volume. Since shipping costs vary depending on size and weight, many buyers will be concerned about the shipping costs for high quantities. If you’re able to eliminate this concern for them, they will be more likely to buy. 
  
  
• The last thing that you can do to effectively manage MOQs as a seller is to eliminate your less popular products that people aren’t willing to buy in larger quantities. This will help you save tons of money on storage and production of products that haven’t proven to be profitable. 

Final Thoughts on Minimum Order Quantities

As you can see, minimum order quantities are a valuable tool for companies to use to stay profitable and get rid of large amounts of inventory as quickly as possible. It works particularly well for suppliers and wholesalers who are looking to cut down on costs by manufacturing or purchasing in bulk. With the right planning and effort, you can make MOQs work for you too! 

Sources:

1. Negotiate the right deal with suppliers | Info Entrepreneurs
2. 5 Strategies for Generating Consumer Demand | Entrepreneur
3. When to drop products from your product line | Business Resource Center