What is Minimum Order Quantity (MOQ)? A Comprehensive Guide

Business-to-business (B2B) trade is whereby a company buys or sells services to another. In B2B trade, the term Minimum Order Quantity (MOQ) comes up a lot. It means you must purchase a minimum number of particular products.

Some manufacturers and wholesalers will demand to know the Minimum Order Quantity (MOQ) when customers are placing their orders. If a customer isn’t willing to meet the demand, manufacturers, wholesalers, or suppliers might turn them away.

While it may seem counterintuitive to turn away customers who don’t meet the minimum order quantity, it could also lead to higher profits. As a business owner, it’s crucial to understand how MOQ works and how suppliers can use them, especially in low-margin or highly personalised businesses. With proper management and meticulous use, minimum order quantities can increase your bottom line.

How can you use Minimum Order Quantities to benefit your business? Minimum order quantities can work for your business as it increases sales and profit margins. With MOQ standards, suppliers would supply your business's exact products at a time.

Incorpuk in this post puts up a comprehensive guide on MOQ. So, if you haven’t encountered the term MOQ or don’t understand the fuss, you are welcome to our insightful post. We’ll tell you why suppliers impose limitations on buyers, the impact of MOQs on inventory, and how to optimise purchase orders to meet these constraints without risking your business.

Let’s begin by defining Minimum Order Quantity (MOQ).

What is Minimum Order Quantity (MOQ)?

A Minimum Order Quantity (MOQ) is the most minor order size a supplier will sell to a customer at a time. The minimum quantity is expressed as the minimum number of units. Sometimes, suppliers may set the minimum order quantity based on order value.

why do businesses impose MOQs?

Suppliers have many reasons for imposing MOQs on businesses, such as the business selling can cover their overhead costs and make some profits. While a retailer is happy to sell single pieces, manufacturers, wholesalers, or suppliers might need to sell at least hundreds to make profits. Hence, the need for MOQs on purchases.

Why Suppliers Set Minimum Order Quantity

Like all businesses, suppliers have different expenses and limitations to meet. Plus, suppliers must also make a profit on each order to cover transportation, handling, holding, and administration costs to meet.

Typically, overhead expenses only account for a small percentage of an entire order value. Hence, the smaller the order quantity, the more these expenses affect the profit margin. As a result, the supplier can end up with minimal profits or losses.

To keep their business running, suppliers set Minimum Order Quantities to guard their profit margins. Generally, suppliers impose MOQs to generate profits to cover all associated business costs.

Types of Minimum Order Quantity

Most selling companies institute MOQs to help them pay for overhead expenses and make some profit from the sale. What are the different types of MOQs? There are two types of MOQS, namely simple and complex MOQs:

1. Simple MOQ is popular with suppliers or wholesalers, meaning they don’t deal with retail, and there’s only a single restraint on orders. The lower-end limit can be a minimum amount spent or quantity ordered to ensure the business generates profits.
2. Complex MOQ has more than one restraint requirement for orders, meaning many conditions are riding on the MOQ. The MOQ restraints can include several units, colours, a specific amount, material, or fabric, and all conditions must be met for the order to be fulfilled. Setting up complex MOQs isn’t easy, as the name suggests. So much information is considered when doing the calculations, including details the buyer will never think about. Therefore, before signing up or agreeing to a high MOQ, ensure you understand every detail to benefit the manufacturer and yourself.
3. Supplier-set MOQs are set by suppliers and presented to brands willing to purchase from them. These MOQs are set to ensure suppliers don’t lose money.
4. Brand-set MOQs are for end customers, but they are rare. A brand can have MOQ requirements for wholesalers to meet.

The Impact of Minimum Order Quantity on Your Inventory

MOQs mainly benefit suppliers but can also make it challenging for brands to balance their inventories. For example, a supplier may demand that an ecommerce brand purchase 100 units of an item. However, if the brand is still young, selling 100 units may be a challenge, leaving them with deadstock and increasing holding costs.

Therefore, merchants purchasing from suppliers with MOQs need to forecast their demand meticulously to avoid overstocking. Additionally, they should also find storage solutions to hold larger inventory quantities. Alternatively, they can find a different supplier to sell them goods in smaller amounts.

Here are different ways Minimum Order Quantities impact your inventory.

1. The average level of inventory a business can hold
2. Amount of capital a business ties up in stock
3. The frequency of reviewing orders
4. The favourable moment to place an order with the supplier

Minimum order quantities affect both the seller and buyer. Sellers who operate under a high minimum order must produce goods in large quantities and have a warehouse that can hold the products. The MOQ also impacts how buyers manage their inventory.

Buyers can work with a supplier who imposes MOQ on a product, look for another supplier with a smaller MOQ, or enlarge their inventory storage. Bulk ordering means the buyer must have sufficient warehouse space and savings to realise the order.

High Minimum Order Quantity (MOQ)

Running a supply business with a high minimum order quantity means they have enough inventory storage to fulfil customer orders. For suppliers who want to keep a low inventory but use the Just-In-Time (JIT) inventory management method they need longer delivery times to fulfil orders.

Substantial inventory requirements tie up a significant amount of working capital and occupy a lot of warehouse space. However, extensive inventories also lower administrative costs since there’s less production, hence fewer orders of raw materials. As a result, there are bulky savings from raw materials and parts in the supply chain.

But, even with the lower risk of stockouts, products are likely to become obsolete for some items like electronics. Here’s a summary of the impacts of high minimum order quantity:

PROS of High Minimum Order Quantity (MOQ)

1. Minimal administration, order processing, and inventory expenses
2. Low stockout risk

CONS of High Minimum Order Quantity (MOQ)

1. High capital investment
2. High holding costs
3. More risk of product obsolescence

Low Minimum Order Quantity (MOQ)

A low minimum order quantity means suppliers don’t require much inventory to fulfil orders as they’ll experience a lower order size. The lower order size translates to less inventory with higher inventory turnover.

Low MOQs can increase pressure on your sales team as they may have to control more customers and work harder to increase sales. In this scenario, administrative costs are higher because of frequent ordering, suppliers risk running out of stock, and the risk of becoming obsolete. Here are the pros and cons of low minimum order quantity.

PROS of Low Minimum Order Quantity (MOQ)

1. Low holding costs due to lower inventory levels
2. Reduced capital investment
3. Low risk of product obsolescence

CONS of Low Minimum Order Quantity (MOQ)

1. Regular review and ordering of products
2. Higher admin, order processing, and inventory expenses
3. Higher exposure to demand and supply issues
4. More risk of stockouts, which you can resolve with a strategic level of holding buffer stock

Benefits of Minimum Order Quantity

Although MOQs can complicate inventory management, they also come with some benefits for ecommerce brands and suppliers alike. Here are some widespread benefits of MOQs.

MOQ Benefits for Suppliers

1. Cost reduction. Instituting MOQs allows suppliers to buy raw materials in bulk, which is more cost-effective. Suppliers already designed for mass production may not incur further labour costs if they process larger orders than smaller ones.
2. Some suppliers only purchase raw materials when a customer makes a purchase, which helps suppliers avoid spending money on inventory that doesn’t sell. The supplier incurs lower holding costs since no raw materials or finished products are on shelves.
3. Higher profits. MOQs guarantee suppliers profits on each production run. Suppliers can adjust product prices and MOQs as time passes to increase or reduce profit margins.
4. Improved cash flow. Proper management of product prices and order sizes MOQs help suppliers to have healthier and more predictable cash flow.

Benefits for ecommerce Brands

1. Cost-savings for large purchases. Most suppliers with MOQs pass some cost-savings onto their customers. Purchasing goods with an MOQ from a supplier in bulk gives the merchant the best price per unit. Thus, buying the MOQ amount might be economical if the goods have a long shelf life and are in high demand.
2. Stronger business relationships. Although discussing MOQs with suppliers can be challenging, it's worth it. These conversations can help strengthen supplier-customer relationships, which is fundamental to a brand’s long-term success.

How to calculate minimum order quantity in 4 steps

Determining the right MOQ amount isn’t a one-shoe-fits-all since businesses are different. Ecommerce brands and suppliers can have a tradeoff: set a higher MOQ at lower prices, or pay a higher cost per unit for lower MOQs. While there isn’t a predetermined formula to calculate Minimum Order Quantity, you’ll find the steps below helpful:

1. Determine demand

Before products are made and the merchant purchases stock, both parties must know how much they plan to sell. For you to do good demand forecasting, you must consider these significant factors to get the correct estimates on the units a supplier or merchant can sell:

1. Product Type
2. Competition
3. Seasonality

As an ecommerce merchant, if your supplier’s minimum order quantity isn’t too far off from your sales, you can manage the difference and store the rest as safety stock.

However, if your supplier’s MOQ is way higher than your expected sales, you have to negotiate with your supplier for adjustments to find a solution or an alternative supplier.

2. Calculate Your Break-even Point

Suppliers and merchants seeking to establish MOQs need to know their break-even point.

A break-even point is the unit price that results in no profit or loss for the business. Usually, suppliers and brands find this price and set their MOQs above it to ensure they make a profit.

For instance, if the production cost of a single item is $0.40, the break-even point is $0.40. If a brand spends $100 buying 50 units from a supplier, its break-even point will be $2.

3. Understand the Holding Costs

Depending on the products you sell, storing some products is more expensive than others due to:

1. Size
2. Duration of storage
3. Special warehousing requirements

You should ensure you don’t hold such products in your inventory too long. Holding inventory is the actual cost of storing all your products. Therefore, you must consider these facts before investing heavily in inventory.

Before buying and storing raw materials, suppliers may need to wait until a purchase is made or finished goods. Conversely, merchants must rethink their decision to comply with high MOQs.

4. Come up With Your MOQ

After gathering the above information, suppliers and merchants are ready to set their MOQ on each product and create a strategy to implement it. Bulk-buying discounts can increase the Average Order Volume (AOV) and the business makes more sale conversions. Where possible, work with customers to maintain strong relationships and make profits.

Factors to Consider When Deciding Your MOQ

When setting your MOQ, there are different factors you must take into account to ensure the benefits will outweigh the costs. These factors include:

1. Production costs. Ensure you set an MOQ that covers your costs to make a profit.
2. Carrying costs. They include inventory holding expenses like storage costs, taxes, and insurance. Ensure the MOQ isn’t too high to lead to carrying costs.
3. Customer needs and wants. Your customers must be comfortable with your MOQ because they might find an alternative supplier if they're too high.
4. The market. You can’t forget the market, as it will tell you your competitor’s MOQ to know if you’ll lower or raise it to remain competitive.
5. Business goals. Always remember your business goals to ensure your MOQ will not be too high to keep you from achieving your goals.

How to Make the Most out of MOQs

From a buyer's perspective, MOQ terms can seem awful while they seem favourable to the seller. Most e-commerce brands prefer to work with manufacturers who affect MOQs, while some brands make their MOQs. The tips below will help you make the most out of your MOQ.

1. Incentivize Higher Spenders

As a wholesaler, you may need an MOQ for bulk buyers to ensure they pay a minimum amount for each product. In exchange, you can offer order volume discounts by charging the retailer less on each unit for guaranteed higher spending.

You can adjust the prices to incentivize higher spenders and woo more to the category. To achieve this, you set MOQ based on volume or cost purchased. Set a low MOQ for more expensive items, and you can make profits whether you sell small or large volumes.

2. Get Rid of Low-Moving SKUs

Stock Keeping Units (SKUs) helps sellers track their inventory. Sometimes, brands have more SKUs than necessary. Hence, they’re stuck paying for storage to fulfill MOQs for items that don’t generate revenue.

Keep your SKU count simple and minimal to help with accurate inventory forecasting. For an ecommerce store to have more than three SKUs is too much. Regardless of the number of SKUs in your store, it’s essential to keep monitoring how much they’re driving sales.

3. Enhance Inventory Turnover

Excess orders can push you to a higher inventory turnover ratio, meaning you’re under pressure to sell your inventory faster. Assuming the high turnover ratio is due to your supplier’s MOQ, you can devise creative tactics to deplete the inventory. Some strategies you can apply include:

1. Flash sales
2. Bundling extra SKUs with other products
3. Including the items as gifts in orders

These strategies will help you clear the inventory while getting value out of the extra inventory. However, if your supplier’s MOQ is too high and your business can’t handle the inventory, it may be wise to find a different supplier.

4. Find  Different Supplier

A higher MOQ than your business can handle can lead to losses depending on your selling goods. So, if your supplier has a high MOQ that always leaves you with a surplus, you may have to negotiate different terms. If they can’t accommodate your wishes, you go ahead to find a different supplier.

5. Ask Questions

Whenever you converse with your supplier or manufacturer, feel free to get creative with questions. Don’t act okay with their MOQ when your business is hurting and losing clients. You can ask the manufacturer if they would allow you to mix and match your order to meet the MOQ standard instead of purchasing excess goods that may take forever to sell.

6. Build Relationships

Build a good relationship with your manufacturer to ensure you understand each other business-wise. Always strive to be on good terms with them, and you may be lucky to be considered for a special MOQ in due time. Here’s how it works:

1. Sell your business vision to the manufacturer and ensure they’re bought in.
2. Your brand keeps soaring high
3. The manufacturer is happy to keep making money as you grow.
4. Pay promptly and place more orders from them.
5. Ultimately, you may have better purchasing terms, making the business more flexible.

When getting into business, you want to succeed. Therefore, view your relationship as transactional, and if your manufacturer isn’t willing to work with you, you might be promoting the wrong business partner. From your end, treat people well, build strong business relations, and grow your business.

Frequently Asked Questions

How can I define Minimum Order Quantity (MOQ)?

Minimum order quantity is the least number of items a buyer must purchase in a single order from a supplier. MOQs are set by suppliers to avoid wasting resources on orders that may deliver minimal or no profit. They can be set based on order value or units.

Why is MOQ essential?

MOQ is essential to manufacturers or wholesalers as it helps them to control their production costs by producing products in bulk. As a result, manufacturers can achieve economies of scale, lowering production costs while increasing profit margins.

Why do suppliers set high MOQ?

Suppliers who set high MOQs hold more inventory, while lower MOQs help suppliers attain lower holding costs and avoid excess inventory they can’t handle.

In Summary

In reality, placing orders with suppliers is more complex, especially a Minimum Order Quantity.

All limitations must be considered before placing the order.

Setting a Minimum Order Quantity (MOQ) means you have targets that your buyers must meet. As a supplier, you must ensure that you can deliver on them. Hence, your inventory handling and manufacturing operations must be top-notch.

You can streamline your processes by implementing enterprise manufacturing software to ensure you have accurate data on orders and inventory. By implementing SKUs, you can place orders your business can handle regarding storage and demand. Plus, you can know if your supplier’s MOQ works for your business.

The most significant barrier to hitting an MOQ is the capital, especially for small businesses on limited budgets. An MOQ can prevent some business owners from working with a manufacturer, but in the end, it might be the miracle of your business needs. Find an MOQ that favours your business' scalability while keeping it profitable.