As you begin to scale your business and expand as an entrepreneur, you might realize you could benefit from having more control over the supplier costs associated with your products. Maybe you’ve expanded to the point where you are ordering a higher number of products from your supplier. Or maybe you are ready to scale up your supply to meet higher demand.
This is where a Minimum Order Quantity (MOQ) from a supplier might benefit. But what are MOQs and how can they work for you and your business? We’ve created this comprehensive guide to help you make MOQs work for you.
What is a MOQ?
MOQ, or Minimum Order Quantity, is a method of product purchasing whereby there is a minimum quantity of products that can be purchased from a manufacturer. Sometimes MOQs can get as high as thousands of units. The benefit of this is that the higher the quantity purchased, the lower the per-item cost. Some manufacturers will quote by the number of products and some by a minimum dollar amount.
The rationale behind MOQs is that the higher quantity of the product, the lower the production cost and higher the profit margin for the manufacturer. But this doesn’t mean that you can’t negotiate a better price. As a supplier or retailer, you have some agency in being able to secure the best deal possible for your business, within cost parameters of course.
If you have an existing working relationship with a manufacturer, and it is clear that both of your businesses have been expanding as a result of this business relationship, there is leverage there for you to negotiate a better deal for a higher quantity of the product purchased.
As with all business dealings, there are advantages and disadvantages to MOQs, and it’s best for entrepreneurs to weigh all their options.
Advantages of MOQs
First and foremost, MOQs offer the best price per unit possible. They are a great way to increase profitability and ensure demand is met in a timely manner. For businesses that sell large quantities of merchandise, buying items in bulk is much more cost-effective than purchasing smaller quantities.
MOQs are a great way to foster sustainable and fruitful relationships with manufacturers and suppliers. In the long run, this will ensure your supply chain is always consistent and available, and any expansion you might be considering in the future will be well-received by your suppliers and manufacturers.
Disadvantages of MOQs
Deciding to work with the MOQ method can be a little intimidating. Fronting the money to purchase a large volume of units without an absolute guarantee that you will sell them all is an investment that can be scary.
The first deterrent to MOQs is affordability. Smaller businesses without the cashflow or flexibility to take a risk probably won’t be able to consider MOQs as an option. Ordering 1,000 units at a price of $10 per unit is not just a lot of money for a small business, but it’s a lot of risk.
Not being able to sell all the products purchased means you’ll be saddled with deadstock that will lose you money. You may have to sell this overstock at a significantly discounted price, and maybe even well below cost. For large businesses, that’s not ideal. For small businesses, it could be disastrous.
A second deterrent might be physical space. For a lot of smaller businesses, particularly eCommerce business owners who work primarily out of their homes, the volume of units required for a MOQ can be difficult to store. If this is a method of supply purchasing you are considering, physical space should also be a consideration. However, you might want to consider dropshipping, which is a method of purchasing units that you don’t actually need to keep in a physical location but can be shipped directly to customers upon purchase.
Last, keep in mind that a supplier’s MOQ estimate usually does not include additional fees like the cost of shipping. If you’re ordering stock internationally, you will also need to factor in the cost of completing the necessary paperwork to get your stock through customs. Alongside this, it’s good to be aware that if you are ordering stock internationally, there is the possibility that it will get delayed at customs, resulting in a delay in you receiving the shipment and possibly lost sales.
How to calculate Minimum Order Quantity
Working with a MOQ method sounds great to a lot of business owners, but it’s important to ensure you’re not over-purchasing, or not purchasing enough. Calculating a MOQ that works for your business is finding the perfect balance between volume and price, what you can realistically sell, and what overstock you might have to markdown.
Step 1: What are your cost margins and break even point
Calculate how many units you need to order to break even on your deliveries. Include incidental and extra costs like shipping, delivery drivers, and customs tax and fees. There is also the unfortunate possibility that some of the product might come damaged at no fault of your supplier, and the cost of which you may not be compensated for. Working in that loss will help mitigate any unforeseen costs.
Once you have those costs, calculate your gross margins. For example, for every $100 of sales, what is your profit after you’ve deducted all expenses? This will result in a gross margin, which, for purposes of this example, we’ll say is 20%.
Now you can calculate your break even threshold. This is your cost divided by your gross margins.
$100 / 20% = $500
That means an approximate $400 markup per $100 of products purchased to break even.
Step 2: What is your target profit?
Breaking even on your MOQ purchases is one thing, but you want to make a profit. Now is the time to set your desired profit target. It’s also important to factor in the day-to-day costs of running your business, including labour, overhead, utilities, and loan or credit payments.
For the purposes of this example, those costs won’t be included in the calculation. Let’s say, though, that you want to double your break even threshold. That’s $800 sales per $100 of product purchased.
If the per-unit cost is $10, that means you have to mark up each unit to $80 to not only break even but meet your desired profit target. The lower the per-unit cost, the more competitive your retail pricing can be, and the more profit you can make.
Step 3: MOQ quantity calculation
Now decide how much profit you want to bring in as a unit of time. For this example, we’ll say profit per 30 days. Calculating for your overhead and day-to-day costs, let’s say you want to net $10,000 per 30 days. How much do you need to make per day?
$10,000 / 30 days = $333 / day
Now calculate how many units at $10 per unit MOQ cost you need to sell to net $333 per day.
$333 / $80 = 4.2 units per day
Now, calculate how many units you need to sell in a 30 day period.
4.2 units x 30 days = 126 units
Therefore, your MOQ you need to purchase in a 30 day period is 126 units. You can also calculate your MOQ unit volume on a per-hour basis if that works for your individual needs.
Why MOQs are important
MOQs can be a real advantage if done right. Making sure you do your research, testing out various manufacturers and suppliers, and negotiating the best price can help your business expand exponentially.
Getting your money’s worth starts with your profit margin calculations. A lot of retail businesses offer eCommerce options along with brick and mortar stores, and there are a lot of businesses that do the bulk of their sales online now. That means shipping costs.
The great thing about MOQs is that when factoring in the optimal units to purchase and your target profit, shipping costs can be built-in. For example, if you’re selling novelty t-shirts, the price per product is probably too small for a business owner to absorb shipping costs. But offering free shipping on a minimum online order can allow you to absorb those shipping costs and ensure your profit margin remains healthy. Plus, this is a great opportunity to upsell!
Sometimes with retail businesses, the only barrier to continued growth is keeping up with supply. Not having enough supply on-hand will deter shoppers and that results in lost sales. A shopper who wants the item will most likely look elsewhere for it if you don’t have it.
Why suppliers operate with MOQs
MOQs aren’t just advantageous to business owners, they’re also advantageous to suppliers. The primary reason why a lot of suppliers use this method of distribution is that it allows more control over the cost of production. Mass producing thousands of units is cheaper per unit than producing a small amount. This results in higher profit margins for suppliers.
How to transition to MOQs
If you’re just starting to utilize MOQs, or are investigating if this method of purchasing is viable for your business, there are a few steps you can take.
1. Identify your MOQ needs
The quality of your supplier will most likely be reflected in their MOQs. When investigating possible suppliers, remember that you are responsible for selling those products to your clients, so you need to make sure that they are of good quality, and not just meet all regulatory requirements, but exceed them. Remember, the quality of these products is a direct reflection of your business. Your customers will have these expectations as well.
2. Supplier history and customer service
Does your potential supplier have an exceptional history of fulfilling error-free orders on time? Or are there delays and mistakes that could impact your business? Check their track record by doing internet and community research.
Having a good customer service team is a reflection of how much care a supplier puts into their products and how important business relationships are to them. Do they have a lot of turnover of customers or a solid history of working with businesses?
When investigating a potential supplier, don’t hesitate to call their customer service and ask questions. If they are unable to answer those questions, or their customer service is sub-par, you might want to reconsider dealing with that supplier.
3. Don’t hesitate to request a sample
If a supplier is confident in their products, they will be more than happy to provide you with a sample. Remember, you’re the one investing in their products and if you are happy with the quality, they know they will have a long and fruitful business relationship with you. That’s a win for everyone.
A supplier that won’t offer you a sample is a supplier that you might want to avoid.
What is a low MOQ?
Trading companies tend to have lower MOQs as opposed to factories. Working directly with a factory means that your prices will be lower if you are ordering products in bulk, as there is no middleman or additional markups. It’s also easier to have custom products made and gives you more freedom to make adjustments to the products during the manufacturing process.
Because of this, factories usually have higher MOQs due to high production costs. You may also find it challenging to navigate the complex maze of relationships required to connect directly with a factory, especially if you are working with a factory overseas that generally only communicates through a representative or agent.
Conversely, a trading company is a supplier that acts as a middleman between you and a factory. These companies work with multiple factories to communicate your needs as an entrepreneur and ensure you get the products you need at the highest quality and best price.
These trading companies are like agents in that they already have close relationships with trusted manufacturers. They also tend to have lower MOQs and a varied product selection for you to choose from. However, trading companies charge additional fees to cover their services on top of the MOQ costs. This can get expensive and require you to markup your products even higher.
A low MOQ tends to be within the range of 1 to 50 units and suppliers that offer this type of MOQ are usually start-up suppliers who are just getting their footing in the industry.
What is the difference between MOQ and EOQ?
When utilizing the MOQ method of supply purchasing, you also need to consider inventory management.
Inventory management is not just the amount of supply you have on hand, but the overall cost of everything associated with purchasing, shipping, and storing that inventory. This also includes deadstock.
There is a method of tracking your inventory called Economic Order Quantity (EOQ). This method is a way of tracking your inventory to minimize the cost of inventory management, including manufacturing costs, storage costs, and order costs. It is a useful method for businesses that are a little more established and sales are consistent over time.
EOQ is a calculation of the number of units that should be purchased to add to pre-existing inventory while considering the reduction of the total costs of inventory. Part of the EOQ method of inventory management is MOQ considerations.
Make MOQs work for your business
Navigating the ins and outs of the MOQ method can be overwhelming, particularly as a newer or expanding entrepreneur. Having clarity of MOQs and what they can and can’t do for your business can help make the decision to choose the MOQ method easier, and help you feel more confident in navigating the supply chain process.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.