August 2, 2021 en_US Minimum order quantities (MOQs) are the smallest amount of a product a supplier is willing to sell in a single purchase. For businesses, particularly distributors and wholesalers, setting an MOQ ensures each sale generates enough profit to cover costs. https://quickbooks.intuit.com/cas/dam/IMAGE/A0AfhcuZV/What-is-minimum-order-quantity-and-how-can-your-business-best-use-it-.jpg https://quickbooks.intuit.com/r/growing-complex-businesses/minimum-order-quantity/ What is minimum order quantity and how can you best use it?

What is minimum order quantity and how can you best use it?

By Katrina Dalao August 2, 2021

Minimum order quantities (MOQs) are the smallest amount of a product a supplier is willing to sell in a single purchase.

While MOQs aren’t monetary, they significantly affect the sale and purchase of products.

For businesses, particularly distributors and wholesalers, setting an MOQ ensures each sale generates enough profit to cover costs. For customers, purchasing products at the MOQ is an investment. In exchange for a larger order volume, customers get greater transparency and discounted per-unit pricing.

What is minimum order quantity (MOQ)?

A minimum order quantity (MOQ) is the smallest amount of a product a supplier requires customers to purchase in a single order.

MOQs are common among distributors and wholesalers, resulting in increased order sizes and a guaranteed profit margin on every order.

The exact minimum amount of product varies according to supplier, product, or style; and is typically set as a number of units or a dollar order value.

Let’s look at a few MOQ examples:

  • A furniture wholesaler sells classroom desks for $100 each, with an MOQ of $1,000 (or 10 desks) per order.
  • A distributor sells cases of bottled water, with 24 bottles of water per case. Each case costs $5 and there’s an MOQ of 84 cases.

Benefits of MOQ for wholesalers

Almost all businesses prefer receiving large orders as compared to smaller ones. This is especially true for distributors and wholesalers, which typically deal with lower profit margins.

By setting MOQs and only handling high volume orders, these businesses can cover costs, manage cash flow, and achieve their profit margins.

Here are some of the critical benefits of MOQs:

1. Attracts serious customers

MOQs are an excellent way to filter out customers who aren’t yet ready to commit to a large purchase order. Maybe they’re looking for low-cost options or want to try the product first. In these cases, they’re a better fit for purchasing your products from a retailer.

Customers who readily agree to MOQs are confident in their ability to sell and succeed with your product. They see the value of their investment and are more likely to become long-term customers.

2. Improves inventory turnover 

Suppliers can use MOQs not just to maximize profits, but also to optimize inventory turnover and warehouse management.

Inventory carrying costs are a significant expense for distributors and wholesalers. Selling in large quantities is also an excellent way to move inventory and increase turnover. The faster the inventory is sold, the lower the per-unit carrying cost.

Over time, suppliers are then able to forecast customer demand throughout the year and optimize inventory orders based on historical sales.

3. Increases profit margins and cash flow

It can be uneconomical for businesses to accept orders below a certain quantity, especially for distributors and wholesalers. Processing small orders can end up losing them money.

Setting MOQs is an effective way to increase order volumes and reach economies of scale.

Economies of scale are cost advantages that come with an increase in production. With costs spread over a higher number of products, suppliers see a lower per-unit cost and corresponding higher profit margin.

4. Streamlines operations and added expenses

Suppliers can likewise purchase their raw materials and supplies in bulk by dealing with high-volume orders. They can streamline shipments and deliveries, and even set MOQs to optimize their production or inventory levels.

For example, MOQ requirements can be set to meet the supplier’s smallest production run. Or if their products are already in cases of 12 or 24, their MOQ can be a multiple of those numbers to prevent spending on repackaging or leaving stray products in inventory.

When setting a MOQ might not be a good idea

Requiring customers to meet MOQs can also pose challenges to generating adequate sales. Here are a few cases where MOQs may not be a good idea:

You can’t afford to refuse customers

When you’re just starting out or entering new markets, it’s advisable not to pose too many restrictions on potential customers. As long as you qualify leads and are still making a profit, the experience and benefits of establishing relationships outweigh higher margins at the start.

MOQs are not standard practice in your industry

Take a look at your competitors and other similar suppliers. Do they have MOQs? Some industries, such as more expensive luxury items, don’t require customers to meet MOQS. Setting MOQs in these cases may end up pricing you out of the market.

You run the risk of losing customers 

Even if you’re established in the market and MOQs are common in your industry, existing customers may be upset or unable to adjust to an increased order amount. Plus, if the MOQ is much higher than a customer’s regular order, you also risk losing loyal customers.

Best practices for setting minimum order quantity

If you think MOQs will benefit your business, here are some best practices to keep in mind:

Assign each product its own MOQ

Every product comes with its own costs, so a blanket MOQ may not achieve your target profit margin or be too high for more expensive products.

While there’s no set formula to calculate a product’s MOQ, it’s important to consider the following:

  • Demand: Look at the product type, seasonal forecasts, market competition, and any historical sales data. Also factor in the production and delivery times needed to meet the demand.
  • Break-even point: The minimum number of products that need to be sold to recover costs.
  • Holding costs: The price you pay for storing the products and inventory before they’re sold. This depends on the size of the product and any special requirements, like temperature-sensitive or hazardous materials.

Base your MOQ on historical data

To lessen the risk of losing customers, look to the size of your average orders and set an MOQ within that range. This accommodates your existing customers while also helping to set fair MOQs for incoming orders.

Review your terms and conditions

While MOQs generate a favorable profit margin, these larger orders can also lead to larger returns. Some customers may have difficulty selling within a reasonable time frame and request to return the unsold products. After setting any new MOQs, review your return policy and other terms and conditions.

Focus on customer relations

Products with MOQs are expected to bring in fewer but larger and higher-value orders. The customers you attract value and invest in your products. Provide them with great support and service, and reap the benefits of long-term customer relationships.

How MOQ affects inventory management 

By setting MOQs, a supplier controls the amount of product that moves out of inventory at every sale. Therefore, the selected MOQ will naturally play a role in inventory turnover, forecasting, and overall inventory management.

High MOQs, for example, will increase profits and turnover rates, but can also create large fluctuations in on-hand inventory. A few orders can already leave a supplier with low stocks and unable to fill any further orders.

To buffer against these situations, suppliers will need to reassess their supply chain and hold more safety stock to fulfill higher MOQs. This requires larger facilities, more staff, and higher maintenance costs.

More inventory also carries a greater risk if left unsold, especially in the case of products that are seasonal, trendy, or perishable.

Low MOQs won’t create significant inventory fluctuations. And if a supplier can align their production with replenishing inventory quickly, a lower MOQ will reduce the need for larger upfront purchases, facilities, and utilities costs.

However, dealing with smaller quantities incurs an increase in shipping costs and additional labor and scheduling efforts.

No matter what MOQ you decide on, it’s essential to look at past inventory turnover and overall industry trends. Forecast how much product you need on hand to satisfy demand for a given time period, and determine the required lead-time to replenish inventory.

All these factors will help to optimize your distribution or wholesale business and maximize long-term profit.

The difference between MOQ vs. EOQ

MOQ and EOQ, or economic order quantity, are two different quantities that affect a supplier’s inventory levels.

Whereas MOQs are the smallest order size accepted by suppliers, EOQs are the ideal number of products a supplier should order to minimize costs and still meet customer demand.

EOQ primarily looks at annual demand or sales forecasts, order costs, and holding costs. EOQ protects against over-ordering, and frees up cash flow for other business needs, but assumes demand, order costs, and holding costs remain constant, which may not always be the case. It also doesn’t factor in shipping costs or any quantity discounts.

Conclusion

Distributors, wholesalers, and other suppliers typically operate at lower profit margins. MOQs are an accepted practice to ensure these businesses attract serious customers and maintain profitability in the long run by achieving economies of scale.

While there’s no set formula to calculate the ideal MOQ for a product, establishing MOQs helps wholesale and distributor businesses account for the costs required to produce and transport products, align with consumer demand forecasts, and protect the minimum profit margins needed to cover costs.

Whether you decide to set MOQs for some or all of your products, it’s important to be aware of the minimum purchase and margins you need to remain profitable.

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Kat Dalao is a content manager based in New York. She spent the majority of her career in magazine publishing, first as a features writer and then a creative director, before making the move to digital. Read more