Whether you have a direct to consumer or B2B business (see what is a B2B business), you probably prefer large orders to small ones. That's where minimum order quantity (MOQ) comes in handy. By establishing MOQs for your products, you can ensure that orders are cost-effective, profitable, and deliver a consistent gross margin.
This blog post covers how MOQ works, how to implement it when running a wholesale business, and the pros and cons of using it in your business. Best of all, BlueCart offers our BlueCart Digital Storefront that comes with minimum order quantities and minimum size built-in to our eCommerce platform.
MOQ Meaning: What Does MOQ Mean?
MOQ stands for minimum order quantity. It is the minimum amount of a product a customer must order for the business to be willing to fulfill the order. MOQ, sometimes referred to as minimum order size, can be measured in either units or dollars. Whichever best helps the business achieve their target gross profit margin. Profit margin is calculated using a restaurant profit margin formula.
Businesses that operate in an online marketplace with a wholesale directory or manufacturing markets are the most likely to use MOQ. This allows them to avoid receiving low-value orders and ensure they recoup their inventory carrying cost.
MOQ is most often required by wholesale suppliers, wholesale distributors, and B2B businesses, where selling and shipping small quantities or low-value orders is not financially viable.
By the very wholesale definition, those who purchase wholesale products need to buy large quantities of product in order to profit when they resell it. The appropriate MOQ varies by business and product, and can be implemented a few different ways:
- Undercut your average order. You don't want to scare away your current customers when implementing an MOQ. Look at your historical data and calculate your average order size. Then, set your MOQ just below that number. Remember, this can be either the dollar amount or number of units per order. This will ensure you don't lose your valuable business while also preventing smaller orders.
- Match your MOQ to product value. Though it can be complicated and time-consuming if you have many SKUs, setting MOQs for individual products will maximize revenue and limit shipping costs. It will also keep customers happy since they won't be required to order a large number of more expensive products. The SKU number or UPC code will allow you to differentiate the products. For food suppliers, BlueCart’s Digital Storefront is a great option for this. It's an all-in-one eCommerce platform that has integrated MOQ options, cut-off times, delivery options, and more.
- Use your cheapest product. If there isn't a wide gap between your cheapest and most expensive products, setting your MOQ based on the cheapest is a viable option. Customers can no longer order a single cheap item and cost you money. Plus, your more expensive items will drive more profits since they must also sell the same amount.
- Base it on raw materials inventory. If you're a manufacturer, you should calculate the number of materials used in producing a single item. Then, set your MOQ based on these costs to ensure you make a profit when shipping the finished goods. If you're a reseller, you can also do this by passing along the MOQ from the manufacturer. For example, if you are a caterer that must order steak in batches of 50, you should sell them as an MOQ as well. You will likely not choose 50, but you may require 20 or more steaks. This will ensure you maximize your profit margin.
MOQ Pros and Cons
Requiring a minimum order from your customers comes with both benefits and problems. Here are a few.
- Avoid losing money on shipping and handling or production. This includes saving on expediated shipping, flat rate shipping, overnight shipping, and eCommerce shipping. The entire purpose of an MOQ is to avoid losing money on your products. Order fulfillment has associated costs, and they can quickly snowball when you are shipping many small orders or low-value products. Setting an MOQ means you can determine your own break-even and control your profit margins.
- Build strong relationships. Customers who purchase your average order quantity or above are more likely to become return customers. They are also more invested since they have to spend more on their orders. These are good supplier relationship management techniques.
- Can be financially difficult to set. If you sell products at a very low cost, your MOQ is likely going to have to be set high to ensure a profit. This can be difficult to do since most customers won't want to buy an exorbitant number of products. In this case, you may be better off trying kitting and selling these products in a bundle with more valuable ones.
- Barriers to entry. Unfortunately, MOQs are often prohibitive for small businesses or other customers. Some customers also prefer to be cautious when placing their first order with a business. You may miss out on building relationships that could yield long-term profits.
- Can upset existing customers. If you already have a base of customers when you implement an MOQ, some may not be happy about it. It can feel like you don't care about your relationship, just money. Keeping your MOQ below the average order quantity can help avoid this issue. You should also include it in your eCommerce business plan from the start so no customers are surprised.
To achieve optimal results, MOQ should be product-specific and based on the price of the product. The rule-of-thumb is the higher the product's value, the lower the MOQ. For example:
If you are a food wholesaler who sells cans of tuna for $2 each, you can have a relatively high MOQ. Say you require 200 cans so fulfill, that's only $400 for the customer. This seems like a reasonable requirement.
However, if you sell turkeys for $20 each, an MOQ of 200 would be $4000 and likely be too high for most customers. This is very important if your customers are looking for affordable subscription box suppliers. You can't overcharge and set an MOQ.
Luckily for that food wholesaler, the BlueCart Digital Storefront can help them set MOQs for their products. It would also turn over the hard work of store design and structure, types of menus, and payment processing software, so they can focus on selling.
Maximize Your MOQ
Now that you know all about MOQs, you can use them to your advantage and avoid having to fulfill costly orders. This is part of the order fulfillment process. As long as they're implemented well, you can see a dramatic effect on your bottom line.
You can choose to base it on either order value or quantity, so pick whichever makes sense to your business. Just make sure you still ensure the best product and service to your customers and your relationships can continue to grow.
Now you can focus on growing your sales and building relationships. Cross selling is a great way to sell underperforming items and increase revenue with little effort. You should also use a catalog creator or digital catalog software to build an easily shoppable list of your products. This includes a digital catalog.
MOQ vs. EOQ
Both MOQ and EOQ have to do with product order quantities. This is what makes them easy to confuse. However, the MOQ and EOQ have a few differences.
EOQ stands for economic order quantity and it is used to identify the ideal quantity of inventory to keep in stock in your warehouse. This is done so that you don’t spend too much money on storage without running out of products.
MOQ is used by sellers or suppliers to identify the minimum purchase amount of a product. This number often causes businesses to purchase extra inventory which results in a high EOQ.
Types of MOQ
Low and High MOQ are the two types of MOQs that manufacturers and retailers offer.
Unlike low MOQ, high MOQ doesn’t have a specific value. In fact, it varies based on the product types and industry. However, companies with high MOQ tend to favor the top 20% of stores. For example, some large and multi-chain retailers can’t buy from certain manufacturers. This is because those manufacturers cater to buyers within the top 20% of the industry.
A low MOQ is within the range of 1 to 50 units. Most suppliers with such MOQ are startup suppliers. In many cases, they’re new to the industry and are just getting started on identifying their niche market. The MOQs they set don’t guarantee that they’ll make it to their break even cost, but these suppliers would rather suffer a loss than lose potential customers.
MOQs aren’t always set in stone. In fact, some are negotiable. Manufacturers might consider changing the MOQs to appeal to both parties.
Frequently Asked Questions About MOQ Meaning
Minimum order quantity is an oft-talked-about element of wholesaling. Check out these frequently asked MOQ questions and our answers to get a better feel for it:
What is MOQ?
MOQ stands for Minimum Order Quantity and it's the minimum amount of products that can be ordered from a wholesale distributor. This minimum is set by suppliers so that they can maintain profits and avoid selling smaller quantities of products. Look into how to run a wholesale distribution business to see how MOQ affects the business as a whole.
Why Is MOQ so high?
Minimum order quantity, or MOQ, tends to be high because wholesalers need to sell a certain amount of goods to cover their costs of production. Oftentimes this carries over into distributors too, like wholesale alcohol distributors.
Another reason MOQ can be high is because companies have a minimum number of units to produce in a production run, or are trying to profit off of their raw material suppliers’ MOQs.
MOQ is common in hundreds of industries, but the final prices and order quantities depend on several factors. A small clothing retailer may order 100 units of one type of shirt for their store, whereas a retail chain may order 500 units of a toy for several stores.
How Is MOQ calculated?
MOQ, or minimum order quantity, can be calculated by dividing your business’s hourly order volume by the number of deliveries you can fulfill per hour. Here’s an example: $780 hourly order volume / 4 deliveries per hour = $195 MOQ.
Bear in mind your MOQ is not how much you’re profiting from a sale; it’s your gross revenue for one sale. You have to factor in delivery costs such as last mile delivery, labor cost, taxes, and any other fees before profit can be determined.
What Is the Difference Between MOQ and SPQ?
MOQ, or minimum order quantity, is the minimum amount of products that can be ordered. SPQ, or standard pack quantity, is the minimum multiple of products that can be ordered in one package. It’s important to have a clear idea of both your MOQ and SPQ so your buyers have an easy time placing orders.
Most industries vary widely in terms of MOQs and SPQs. For example, children’s toys come in significantly different SPQs than toothpicks, food, or hardware. A toy may have an SPQ of four, where toothpicks may have an SPQ of 5,000 or more.
Similarly, MOQ variability depends on what product is being purchased, who produces it, and what their production requirements look like. A paper producer may have an MOQ of 50 reams, where a furniture producer may only have an MOQ of five or six.