What is the Minimum Order Quantity or MOQ? Meaning and everything you need to keep in mind before sealing the deal with a supplier.
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Suppliers often require a MOQ (minimum order quantity) before they do business with you.
This can be a major obstacle, especially for small online retailers that are just starting out.
Retailers have to contend with MOQs from suppliers, which can often prevent them from getting started at all since it can be quite expensive to pay for all items upfront.
Besides, this also puts merchants at risk if they end up stuck with excess inventory that takes physical space and won’t bring in any profits.
What matters the most is to understand what MOQ means for your eCommerce business, and what you should look for before sealing the deal with a supplier.
This will enable you to boost inventory turnover, turn returns into exchanges, and ultimately cut down costs by managing your inventory and warehouses more efficiently, whether or not you’re subject to a supplier’s MOQ.
MOQ stands for minimum order quantity and represents the minimum amount of products a customer (business or consumer) must purchase for a supplier or manufacturer to fulfill their order. MOQ can be measured either per unit or per price value, whichever best helps achieve the target gross profit margin.
To put it simply, MOQ is the minimum number of units a customer must purchase in order for a business (manufacturer or wholesaler) to fill their order. For example, a supplier selling a product priced at $100 might require a minimum order quantity of either 100 units or $10,000.
The minimum order quantity is essential for suppliers because it sets the limit on how few products they can sell and still make a profit. If manufacturers set a low minimum order quantity, they might not be able to cover production costs and even shipping costs.
For instance, take into account the fact that some manufacturers might only make a small profit on each product, but they make up for it by selling large quantities.
For them, the MOQ is often based on the actual size of the factory and the minimum quantity that can be produced in a single production run. For suppliers, setting MOQs often means an improved cash flow, lower inventory costs, and ultimately better profit margins.
Considering all these factors, manufacturers and suppliers need to decide on the MOQ that will allow them to break even and make a profit in the long run. In the end, it’s all about finding that sweet spot where they can maximize their profits while still meeting the needs of their customers.
When manufacturers and suppliers calculate MOQ for a product, they normally look at the big picture.
That means taking into account both the gross profit margins, minimum spend, and the overall production costs, including raw materials, transportation, marketing, and administrative expenses.
When it comes to setting a minimum order quantity (MOQ), manufacturers and suppliers have to strike a delicate balance. If they set a low MOQ, they might put a strain on their business and lose precious resources.
On the other hand, setting a high MOQ can bring in more profit but this also enables retailers to get the best deals when buying in bulk.
To sum it up, you can calculate the MOQ in 5 main steps:
Forecast customer demand
Establish the break-even point
Calculate all hard and soft costs
Determine the target profit margin
Settle on your MOQ
If you find it challenging to pay upfront to meet a high MOQ, one option is to seal the deal with manufacturers and wholesalers who are willing to work with smaller orders.
This can be tricky, as many manufacturers have their own requirements they need to meet to keep their business afloat and be profitable.
On the other hand, if your suppliers allow it, you can also pay in installments instead of making an upfront investment that covers all costs.
Another way is to pre-sell products and reach your minimum order quantity. This option might come with some risks, as there is no guarantee that all customers always follow through with their purchases.
First of all, for retailers, the main advantage of going with a supplier that requires MOQ is that they can get the best deal available on buying in bulk. It’s as simple as that— the higher quantity you order, the better the price per unit.
Buying in bulk will also be more profitable for the end customer, enabling you to create better offers for them and sell products in bundles which ultimately lead to higher AOV (average order value).
Purchasing huge quantities works best for larger companies with a high demand that need to stock large quantities of merchandise to avoid backorders and out-of-stock situations.
Although this also leads to increased warehouse storage costs, in the end, it might be more profitable to buy and sell in bulk than to cover additional transportation, packing (and unpacking) expenses.
MOQs and bundles are not for wholesale suppliers only! You can also use minimum order quantity and bundling to your advantage.
For instance, if you’re offering free shipping on all orders, you can reduce your last-mile delivery costs in the long run. You can also negotiate bulk discounts for all transportation stages with your shipping company to save up or offer your customers cost-effective shipping rates on smaller orders.
Moreover, providing customers with bundles and bulk deals will directly impact the average order value. Take, for instance, the following example from Yogasleep on Amazon:
However, you need to make sure these offers won’t negatively impact profit margins too much.
If the MOQ or bundling models might not be the best fit for your business, another way you can ensure sales keep on rolling is a subscription model for your physical products. This way you’ll keep customers coming back for more each time the subscription is renewed!
Here’s how London Drugs automates deliveries to build customer loyalty and boost sales:
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In retail, sometimes you’ll have to deal with backorders and slow supplier lead time but also with MOQs and slow inventory turnover.
What matters the most is to have the right tools and processes in place to minimize any negative effects and build efficient systems. WeSupply enables you to achieve this without making any compromises.
Check out the three ways our platform enables you to overcome MOQ challenges.
(The last one is our favorite.)
When you have to pay a large sum upfront to cover the MOQ, it can be challenging to also have customers cancel their orders on you due to lack of responsiveness and post-purchase anxiety.
The best you can do is to be proactive and offer them order tracking options that mitigate most of that anxiety and help you build customer loyalty.
However, sometimes customers might just ask for a return, and that’s okay. What you can do to minimize transportation costs and overcome some of the supply chain challenges is to set up intelligent disposition locations using WeSupply. If you’re selling perishable goods (e.g., food and beverages), you might even consider letting the customer keep the item entirely.
Keep in mind that a return doesn’t always end in a refund. You can offer customers the opportunity to exchange an item or accept store credit instead of reimbursing the amount to the original payment method.
WeSupply enables you to provide gift cards and store credit coupons to customers who exchange items instead of returning them to reduce overall costs and boost future sales.
This helps you keep the inventory turnover rate going up while cutting down the number of refunds which can add more pressure on your already tight budget.
For instance, if you offer customers an extra $10 store credit coupon, you can secure the sale and even increase the average order value. This way, you’re not sending away the customer, encouraging them to return to your store.
Last but surely not least, to offset the effects of MOQs, including high inventory costs and low sales volume, WeSupply offers personalized post-purchase email and SMS notifications. Not only do these keep customers updated on the status of their orders, but also allow retailers to upsell and cross-sell based on individual consumer behavior.
You can add personalized offers and hot deals directly to your order tracking pages and delivery notifications using WeSupply alongside our out-of-box integrations with tools like Attentive, Justuno, and Omnisend.
This allows merchants like yourself to keep customers informed and engaged, which can lead to repeat purchases and ultimately an increased number of sales.
Most manufacturers and suppliers are setting MOQs to cover the cost of production and transportation, from raw materials to storage and shipping, which can often take a toll on their businesses.
In other words, these businesses pay the price of producing and distributing an item before selling them, and if they don’t, they’re stuck with the bill.
Additionally, suppliers set higher MOQs to increase the average order value and take care of the production cost without increasing the price per unit. This allows merchants to spice up a bit their prices and get their fair share of return on investment.
All in all, although MOQs are not bad for your eCommerce business, you still keep an eye on your inventory, supplier relationships, and customer demand to be as profitable as possible.
See how WeSupply can help! Watch our platform in action to convince yourself.