What does MOQ Mean and How to Calculate It?
In the world of retail, having the right and right amount of inventory is a key aspect of your business. You would want to make sure that you always have enough stock when a product picks up so you are not losing the opportunity to sell and make a profit. But at the same time, you also want to make sure that you do not end up with overstock inventory that can hurt your profit margin. For this reason, you have to be careful when determining your Open To Buy (OTB) budget for each product based on historical data or the initial investment you are willing to make.
Once you have your Open To Buy budget set, you can start the sourcing process. If you do not yet have a supplier you are working with, Minimum Order Quantity (MOQ) can be a good filter when choosing one. If you do have a long-standing relationship with your wholesale supplier, you are likely familiar with their MOQ, and depending on the relationship you have, you can negotiate some room for flexibility.
In this article, we are giving you an overview of what MOQ means, what factors you need to consider when calculating it and how the calculation itself works. Also, we will provide you with some tips on how to make the most out of MOQs set by your suppliers.
What is MOQ (Minimum Order Quantity)?
The Minimum Order Quantity of a product is the lowest number of items you can order or purchase from it at a time. This practice is mostly used by manufacturers and suppliers when they are selling their products in a B2B business transaction to retailers or resellers. The reason for suppliers and manufacturers to set MOQs in order to be able to keep production profitable and ensure that you are buying enough in order for them to also make a profit and be able to keep prices low for their resellers.
Usually, the MOQ depends on the nature of the product and can vary according to suppliers as well. Products with a higher price that are more costly to produce will likely have a smaller MOQ, while those which are cheap and easy to produce usually have higher MOQs. In this article, we will explain how you can navigate MOQs as a buyer.
How to calculate Minimum Order Quantities?
Now that you know what MOQ means, we can move forward with explaining how it is being calculated. There is no right amount of MOQ as every business works differently, so we can not have a one fits all solution in this case. You have to be aware that there is usually a trade-off between either having a higher MOQ or paying a higher price when purchasing a lower volume. While there is not an exact formula for calculating the Minimum Order Quantity, by following the below steps you can understand its concept better and you get a point where you can start.
Determine your demand
Determining your demand is not always easy, especially when you are just starting up your eCommerce business but you can always use industry benchmarks as your starting point. In order to forecast your demand, you need to take into consideration the type and seasonality of your product, competition, and other factors as well. The goal is to best match your supply and demand in order to make the most profit from the inventory purchased. If your demand increases you also have to take into account the factors that determine the time needed for your supplier to provide you with a reorder quantity. These lead times consist of the freight transit time, warehouse processing time, and other potential delays that might affect how soon you receive the goods.
Know your break-even point
When you are lucky enough to work with suppliers that have a really low minimum order quantity you will need to establish a number that will serve as your MOQ. In this case, you would want to start with calculating your break-even point as this will highly affect the number of goods you would want to purchase. The break-even point is when your revenues will equal your costs so from this point onwards you are not losing money by operating your business. This calculation will allow you to determine the point or the number of goods sold when your company is starting to earn a profit for you. In order to calculate your break-even point, you will need to know first of all the price you are paying for one unit of product that you are selling, your fixed costs such as rent or warehousing, and your variable costs like marketing. The formula you should be using is as follows, Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit).
Be aware of the cost of storage and warehousing
Many new businesses mistakenly do not pay enough attention to the cost of storing inventory but this can eventually hurt their profit margin badly once they are unable to sell through a certain product in time. Some items might be more costly to store than others, due to their value, size, expiration date, or special requirements they need once stored. The holding cost of your inventory can turn out as a huge burden on your business if you do not take everything into account before investing in a large lot of inventory. For you, it’ll be financially beneficial to store those goods for the least amount of time that are costly to store and allow more time to sell through to those which are less expensive to keep in the warehouse.
Establish your OTB and come up with a MOQ
After following the steps below and taking all factors into consideration you can now determine the budget you are willing to spend on your next order, which will be your Open To Buy amount. This should be reviewed on a weekly basis based on the amount you manage to sell during the previous weeks. Once you know how much inventory you can invest in while maximizing your profit and keeping a steady cash flow, you can determine your ideal Minimum Order Quantity. Sometimes you will find that your supplier offers a much higher MOQ than what you would ideally invest in. In this case, you have to evaluate if it is worth it for you to risk the investment in a larger stock or you can also have a look around and find another supplier that works with lower MOQs.
What does MOQ mean to you and how to navigate around it as a buyer?
Minimum Order Quantities or minimum spend thresholds might seem like a nightmare to you when you are on the buying side and operating a relatively small eCommerce store. But keep in mind that most of the businesses like yours are partnering with wholesalers that also have a MOQ requirement so you will also surely be able to navigate and work around these numbers. In the next section, you can read some tips and tricks on how to manage MOQs.
Try to negotiate a better deal
If you feel like the MOQ set by your supplier is a little over what you initially wanted to buy but you are really in need of inventory you can try to negotiate a better deal. Your supplier might not be able to grant you a better deal on your first wholesale order, however, after you have established a long-standing relationship you might get the opportunity to benefit from some deal. Especially if you are committing to buy more, your supplier might give you some extra discount. Or you might have the chance to pick and mix styles to reach the MOQ.
Get rid of your slow-moving SKUs
When you are listing a larger variety of products in your store you are always risking keeping inventory that sells slow or in the worst case, will not sell through at all. This way you will just end up paying the storage cost and never see a return on your investment. In order to avoid investing in the MOQ of slow-moving SKUs, you will have to monitor your sales constantly and see how each product is performing in your offering. This will allow you to determine which are the ones that you would not want to invest in again. Unfortunately, it is a common mistake of entrepreneurs to overestimate the demand for a product in different colorways or products that only have a slight variation between them.
Purchase from a wholesale supplier
When you are buying directly from a manufacturer you can oftentimes run into huge MOQs that are just unsustainable for the size and the stage of your business. You can easily avoid these by finding a middle man that can sell you the same products. Multi-brand marketplaces and wholesale suppliers such as BrandsGateway operate with much lower Minimum Order Quantities. At BrandsGateway you can start purchasing stock of styles you pick and mix yourself at a MOQ starting as low as 1,000€/$1,200. Also, this way you can enjoy a wider selection of brands and styles compared to buying one style in large quantities directly from the manufacturer. Moreover, buying from a wholesale supplier and purchasing multiple styles will give you an opportunity to sell faster to your customer because you can get a wider product range with relatively low investment.
Focus on your inventory turnover
When you are purchasing a larger bulk of inventory due to Minimum Order Quantities that your supplier set, you are under bigger pressure to boost your inventory turnover as you have invested a larger amount of cash upfront. Although this does not have to mean that you need to run flash sales or clearances in order to clear the inventory the fastest way possible. This would not only harm your profit margins but also the reputation of your shop or the brands you are selling. For this reason, you should try to attract customers in a creative way and convince them to go through with the buying process. If you need tips to drive and increase sales in your eCommerce store, make sure you read our previous article that provides you with 80 useful tools to do so.
Establish a good relationship
Establishing a good and long-term relationship with your wholesale supplier is key in all aspects of doing business. If you have a trusting relationship you will automatically get in a better position when negotiating, not only MOQs but other benefits as well so make sure you focus on this aspect as well. You can do so when you are first working with a supplier by selling them your business concept and getting them engaged with your brand.
Once you have successfully done this, focus on keeping your eCommerce business growing. The more orders you get, the more orders you will place with your supplier which will ultimately benefit both parties. It is guaranteed that they will be happy making more and more money through your business. While focusing on boosting your sales, make sure that you always pay your supplier in a timely manner so you establish a good “credit score” with them. Always view your relationship with your supplier as a partnership and not only as a transaction and pay attention to treat all of their employees well and with respect. Over time, this will guarantee you that your supplier always will have your back even in difficult times like we are in now and that is invaluable.
Table of Content
- What is MOQ (Minimum Order Quantity)?
- How to calculate Minimum Order Quantities?
- What does MOQ mean to you and how to navigate around it as a buyer?