By establishing MOQs for your products, you can ensure that orders are cost effective, profitable, and deliver a consistent gross margin.
Here's how MOQ works, how to implement it, and the pros and cons of using it in your business. Best of all, in 2019, BlueCart introduced the BlueCart Digital Storefront that comes with minimum order quantities and minimum size built-in to the eCommerce platform.
What Does MOQ Mean: MOQ Definition
MOQ is an acronym that 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.
Businesses that operate in the wholesale and 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 and B2B businesses, where selling and shipping small quantities or low value orders is not financially viable. 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 your 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. For food suppliers, the BlueCart 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 or production. The entire purpose of an MOQ is to avoid losing money on your products. 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.
- 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 product 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.
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.
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, menus, and payment processing, 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. 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.