MOQ stands for “minimum order quantity,” and if you’ve ever had to spend “just $5.04 to get free shipping,” you’ve experienced a form of MOQs in action. But what does MOQ mean to you as a producer of goods and products? If you’re in eCommerce, you’re going to need to be intimately familiar with the concept.
Here’s what minimum order quantity is at its most basic level: the minimum number of units a business can sell and still make a profit.
How Does Minimum Order Quantity Work?
Let’s use a minimum order quantity example and say you need to sell some t-shirts. If someone orders one shirt, the time involved in packing it, the cost of the packing materials, and the price of shipping all add up to make selling that shirt unprofitable.
But what if you sold those shirts 100 at a time instead? Now, the shipping and packaging costs are spread across all those shirts, and suddenly it’s possible to turn a profit.
Why Do Suppliers Use Minimum Order Quantity?
Suppliers want as much sales margin as possible. The margin represents the gap between their expenses and income. In using minimum order quantity, suppliers can increase that margin by reducing costs.
How Can You Drive Profitability Using MOQ?
Once businesses figure out the number of orders required for profit, they can ride the MOQ train to sales success.
Perhaps a business deals exclusively with other businesses that buy in bulk. Once a company can stop selling small, unprofitable batches or even single products, it can widen its margins and let other retailers handle the direct sales.
How Does Minimum Order Quantity Impact Inventory?
There are two roads to follow regarding order quantity, and they drastically change what type of business you’ll run.
High Minimum Order Quantity
Warehouse space will be needed if you plan on filling large orders, and you’ll be paying for it more than the low-minimum-order-quantity business down the street. The benefits are that you’ll be able to satisfy orders quickly, order raw materials less often, and even save by purchasing said materials in bulk yourself!
The downside is that if there’s ever a reason you can’t sell your stock — perhaps if you sell clothing that went out of style — you’ll be stuck with it until you figure out a way to unload it all.
Low Minimum Order Quantity
If your business can satisfy smaller batches of orders and remain profitable, then there’s less need for large amounts of inventory, and you won’t need as much warehouse space. Also, if a product goes out of vogue, you won’t have shelves full of unsellable merchandise.
This approach also means that you’ll be ordering more materials constantly, which will require more administrative staff to handle, and lead times for customer shipment will be longer. Additionally, you’ll need a sales team willing to deal with a larger volume of customers.
High MOQ vs. Low MOQ
To break down the differences between high and low MOQ as clearly as possible:
High MOQ is best when you have lots of inventory and fast order fulfillment. It’s well suited to low-margin products intended for bulk sales.
Inventory can remain low, so order fulfillment can take longer. This consideration means a low MOQ is well suited for high-margin products that are less reliant on bulk sales.
What Are the Types of MOQ?
The size of the business and how well it can fulfill orders will determine how complicated its MOQ is.
With a simple MOQ, a company might have one order quantity requirement. This requirement might be based on the amount of money or the number of products ordered.
Companies willing or able to handle more complications can develop multiple MOQs. A cosmetics company might have a minimum number of travel-sized bottles that’s much higher than the minimum number of bulk refill bottles, for example.
MOQ Meaning: An Example of Minimum Order Quantity
Let’s go back to our shirt company example and fill in some more numbers. The shirts cost $10 each. Shipping one shirt to a customer costs $7 and requires a $5 box. Since the shirt requires $12 just to get to the customer, the total cost per shirt sold is $22.
Now, let’s spread the cost over 100 shirts. Each shirt still costs $10, but since orders come in minimums of 100, the seller will save on shipping. Now it costs $25 to ship the shirts, and they require a $10 box, but with the shirt order costing the purchaser $1,035, that means the total cost per shirt is only $10.35.
Benefits of Minimum Order Quantity
Thankfully, MOQs aren’t one-sided, benefitting only the supplier. The buyers get some benefits, too!
Benefits for Suppliers
For suppliers, it’s much easier to make a profit by selling goods with MOQs.
Improved Cash Flow
Small orders are hard to predict, and sales can trickle or surge. By having an MOQ, suppliers have a better grasp of how many items they’ll sell, stabilizing cash flow.
Better Profit Margin
MOQs allow suppliers to reduce expenditures on the front and back ends, plus it’s easier to calculate the Cost of Goods Sold. They can order materials in bulk at cheaper rates and get lower shipping costs by sending products in large batches.
Reduced Inventory Costs
By using MOQs, some suppliers can wait until they get orders before creating their products. This approach cuts down on warehouse space and all but eliminates inventory woes.
Benefits for Buyers
For buyers, costs are kept lower because the supplier doesn’t have to raise the price on small-sized orders to make a profit.
Improved Relationships with Suppliers
Because suppliers are generally not selling directly to the public, that means you, the buyer, are as reliant on their products being high-quality and appealing as they are. This reliance will require lots of communication about order quantity, inventory, and order quality. The more this relationship is tended, the more both supplier and buyer will grow.
The buyer gets the benefit of a low cost per unit sale from the supplier, which gives the buyer a better margin when reselling the items.
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