Minimum Order Quantity
MOQ (Minimum Order Quantity): Definition, Formula & Examples
Are you struggling with understanding the concept of Minimum Order Quantity (MOQ) and how it works? Whether you're new to the concept or looking to expand your understanding, this article has you covered. Discover what MOQ means, how to calculate it, and more.
Minimum Order Quantity: What Does It Mean?
Minimum order quantity is the minimum number of units of a product or service that a customer must purchase in order to complete an order with a business entity (e.g., an online store). The purpose of a minimum order quantity may be to ensure that the business entity is able to recover the cost of producing the product or service. Setting a minimum order quantity also encourages customers to make larger purchases.
Types of MOQs
There are in total to types of minimum order quantities: simple and complex. Suppliers have various economic limitations tied to your orders, depending on their products. These constraints encompass machinery, materials, shipping, bookkeeping, and billing expenses. MOQs will either have a limit on one constraint (simple type) or on multiple constraints (complex type).
- Simple MOQ involve one lower limit, typically a minimum value or quantity of units. For example, a supplier may require a minimum spend or quantity of items before accepting your order.
- Complex MOQs, on the other hand, involve multiple requirements. This can include minimum quantities, minimum order value, or other conditions based on the nature of the product. For instance, if you're sourcing fabric for clothing, the minimum order quantity could involve yards or meters of fabric per color, considering multiple criteria for an order.
How To Calculate MOQ
To calculate a minimum order quantity, there is no standard formula, but you can guide yourself through the following four steps:
- Review historical data to forecast demand and to define the needed inventory,
- Calculate the costs to store your products,
- Find out how many items you need to sell to make profit, also called the “break-even point”,
- Based on the last three steps, set minimum order quantity for each product.
To give you a better idea of the calculation and process behind those four steps, let’s find out the MOQ of the following example:
As mentioned before, a minimum order quantity (MOQ) is the smallest number of items that must purchase at once. If a widget costs $50, and the MOQ is 100 units or $5,000, it means you need to buy at least this amount to make the order profitable. The minimum order quantity considers costs like setup, administration, materials, and other factors.
How To Optimize Your Minimum Order Quantity
There are different ways to optimize the MOQ and some might be easier to implement then others. Here you will find a few examples:
- Free shipping for customers who spend a certain amount,
- Reducing the per-item price if the customer buys more,
- Remove products getting slowly out of stock,
- Regularly review supplier relationships by negotiating or look for other options,
- Keep an overview of your business.
Key Takeaways About the Minimum Order Quantity (MOQ)
- Minimum order quantity (MOQ) is the smallest number of products that a business must sell to a customer in a single order. Businesses set MOQs to cover costs and ensure profitability, encouraging customers to make larger purchases.
- Simple MOQs have a single lower limit, such as a minimum value or quantity, while complex MOQs involve multiple requirements, such as minimum quantities, minimum order values, or other conditions. There is no standard formula to calculate MOQ, but there are four steps giving a good guide: first, consider demand, calculate storage costs to find the break-even point, and finally set the MOQ.
- Businesses can optimize their minimum order quantities (MOQs) by offering free shipping for customers who spend a certain amount, reducing the per-item price for larger orders, removing slowly moving products, negotiating with suppliers, and regularly reviewing their business needs.