What Is MOQ? Why It Matters for Your Business
by Jaidyn Farar
Because mass-producing goods tends to be very cost-effective, most suppliers set a minimum order quantity (MOQ). This works out great for them, helping to reduce expenses and maximize profits.
But what about your business?
Complying with MOQs while avoiding overstocking can be tricky, so we’re here with some tips to help.
MOQ meaning: What is minimum order quantity?
MOQ, or minimum order quantity, is the minimum amount of a product that a customer needs to order when purchasing from a supplier. Suppliers establish MOQs to cover the costs of raw materials, production, and transportation and ensure they make a profit on every sale. While MOQs benefit suppliers, they can make inventory management more complicated for ecommerce businesses.
Note: We mostly talk about MOQs in terms of supplier-set MOQs. However, brands may sometimes set MOQs too. For example, if you have retail or wholesale partners, it might benefit your business to establish minimum order quantities. Near the end of this article, we give some tips for businesses looking to set MOQs.
MOQ example: The ecommerce kitchenware business
To better understand MOQs, let’s run through a quick example. Imagine that a small ecommerce business specializing in kitchenware purchases spatulas from a supplier with a minimum order quantity of 500 units. Despite only needing 300 spatulas to meet customer demand, the company now has 500! They’re responsible for selling the new inventory as quickly as possible to lower holding costs.
How does an MOQ work?
An MOQ is determined by the supplier and can be measured in various ways, including number of units, order value, or even weight. It varies by item, with higher-priced products generally having lower MOQs, and lower-priced products having higher MOQs.
Why do suppliers set MOQs?
Suppliers set MOQs to guarantee that they make a profit from every sale, rather than breaking even or losing money. Every product they sell comes with a cost, and they need to recoup those costs and make a little extra for a transaction to be worth their time and effort.
In most cases, suppliers can save money by producing and selling items in large quantities. That’s because …
- They may be able to get discounts when they buy raw materials in bulk.
- When production processes are largely automated, labor costs may be similar for large and small orders, making it more efficient to produce more products at once.
- The same principle holds for transportation; companies that ship lots of goods at once can often get volume discounts from carriers.
Several other factors come into play as well.
Other factors that influence MOQ
In addition to the cost of raw materials, labor, and transportation, the following factors influence minimum order quantities.
- Manufacturing costs. MOQs are influenced by the complexity of the manufacturing process, including the costs of machinery and energy. Suppliers need to cover these costs to maintain profitability.
- Inventory holding costs. Higher inventory holding costs might lead suppliers to set higher MOQs to sell larger quantities faster. Selling lots of goods at the same time helps them lower their storage costs and free up cash for future expenses.
- Lead times. Longer lead times often require higher MOQs so suppliers can efficiently manage their production schedules and reduce downtime between orders.
- Demand forecasting. Suppliers often set MOQs based on expected market demand; if demand is uncertain or seasonal, higher MOQs might be required to cover production risks and ensure profitability.
How MOQ impacts ecommerce businesses
MOQs aren’t necessarily designed to work in a business’s favor, but they can offer some benefits. In this section, we’ll explore both the positive and negative impacts of MOQs on brands.
Positive impacts
MOQs can help businesses save money, avoid stockouts, and build stronger relationships with suppliers.
Cost-savings
Suppliers save money when purchasing raw materials and producing items in bulk, and they may use MOQs to pass these cost-savings to your business, ensuring you pay the lowest possible price per unit. Additionally, when you don’t need to reorder inventory as frequently, you can save on administrative costs.
These savings can provide the flexibility to offer competitive pricing or allocate funds toward marketing and expansion.
Lower risk of stockouts
When you replenish your inventory in larger quantities, you reduce the chances of running out of popular products. This is especially beneficial during peak seasons or when supply chains are unpredictable.
Of course, this benefit doesn’t necessarily apply to slow-moving, less popular products that aren’t at risk for stockouts. In the section “Strategies to handle MOQs” below, we’ll provide some ideas to avoid overstocking items with lower demand.
Better supplier relationships
Consistently meeting or exceeding a supplier’s MOQ can foster strong partnerships and lead to better terms and priority service. After all, suppliers might be more inclined to provide exclusive deals or faster production times for customers they trust and value.
If you push back against MOQs, you can still reap the benefits of better supplier relationships. When you approach the negotiation process with patience and an open mind, you’ll often find that communication improves, with both sides willing to find mutually beneficial solutions.
Negative impacts
When handled improperly, MOQs can lead to serious inventory management problems—and ultimately, higher costs.
More complicated inventory management
At the beginning of this article, we gave an example of an ecommerce business ordering 500 units of product to meet an MOQ, when they only needed 300 to meet demand. Scenarios like this can lead to serious inventory issues.
If you overstock a product with low demand, you could end up with dead stock—inventory that can’t sell. Not only do you lose money on unsold products, but you’re also paying for the warehouse space required to store the products.
In the example above, the kitchenware business needs to find a way to sell more spatulas, perhaps adding them to a “kitchen essentials bundle” or selling them for a discount.
Slower cash flow
When businesses are obligated to place large orders, they tie up funds that could be used for other business operations. With limited cash flow, it’s difficult to continue ordering new inventory until the current stock has sold. This can strain small businesses or those with limited budgets, making it harder to respond to unforeseen expenses or invest in growth.
Strategies to handle MOQs
If you’re facing some of the challenges described above, don’t stress! You have several options for dealing with too-high MOQs, including adjusting your inventory management, negotiating with suppliers, and switching up your sourcing strategy.
Determine if MOQ is too high
Before committing to a supplier’s MOQ, carefully assess if the volume aligns with your sales forecasts and cash flow. Calculate how long it would take to sell that quantity and whether the associated carrying costs make sense, keeping in mind that your assessment will be different for each SKU.
For example, if an item is relatively small, sells out quickly, and/or is inexpensive to purchase, ordering a large amount might make sense. On the other hand, you may want to avoid over-ordering products that are large, expensive, and/or slow-moving. Additionally, consider how long products last. If an item is perishable (like food or beverages) or updated frequently (like electronics), make sure the MOQ won’t leave you with excess stock.
What happens if you decide that an MOQ is too high? The following ideas will help you adjust your operations to avoid negative consequences.
Consider simplifying your inventory
If MOQs are causing problems for your business, adjusting your inventory might help. Take a close look at the products with MOQs that don’t work for your business. Are you selling enough that it’s worth keeping them in stock? If not, you might simply remove them from your product catalog.
Streamlining inventory by focusing on just a few high-demand products can help you manage large MOQs more effectively. By concentrating on best-selling items, you can better forecast sales, reduce holding costs, and avoid the complexities of managing excess stock.
Get creative when selling excess stock
If an MOQ leads to an overstock, don’t despair! You have lots of options for clearing out excess stock. For starters, try running sales on slow-moving inventory. Another great strategy is bundling products together, giving customers a convenient option for purchasing everything they need. Collaborating with partners or launching targeted marketing campaigns can also help ensure that excess products sell quickly.
Be ready to negotiate and collaborate
Let’s say you don’t want to simplify your inventory, and you’re not interested in dealing with excess stock. In that case, your next option is to approach your supplier and try to negotiate a lower MOQ.
Does negotiation really work? Yes! Just keep in mind that you won’t always be able to sway suppliers. To increase the odds of getting better terms, focus on building trust. As you show suppliers that you’re a repeat customer, you’ll gain leverage in negotiations. They’ll likely see that your business is growing, understand that you’re a valuable partner, and be willing to compromise to keep you coming back.
Switch suppliers if necessary
If you’ve tried the ideas above and still face inventory issues because of high MOQs, switching to a different supplier may be the best move. This is especially true if you’re a new business that doesn’t have an established customer base or if you’re still testing new products to find what works for your target market. Researching alternative suppliers with more favorable MOQs or finding ones that offer tiered pricing based on order size can lead to better partnerships.
Want to establish your own MOQs? Here’s how to calculate
If you’re looking to set MOQs for your retail partners, you need to find the perfect balance between maintaining profitability and retaining customers. These tips will help you determine the optimal MOQs for each product you sell.
- Look at your historical sales data. You don’t want to risk losing customers when establishing MOQs for the first time. To make sure your minimum order quantities are reasonable, start by diving into your historical sales data. Find the average order size for each product, and set your MOQ below that.
- Offer grace periods. Setting your MOQs below the average order size isn’t the only step you can take to keep customers happy. Consider offering a grace period before enforcing minimum order quantities, giving buyers time to adjust their inventory management strategies.
- Base the MOQ on product value. Set higher MOQs for lower-cost products and lower MOQs for higher-cost products. If there’s not a big difference in product value across SKUs, you can set a universal MOQ—just make sure to base it on the value of the least expensive item. Review MOQs periodically and adjust them based on market trends.
Streamline every order with EasyPost
Understanding how minimum order quantities work will help you craft an inventory management strategy that works for your business. You’ll eliminate overstocking and stockouts, keep the cash flowing, and—most importantly—keep your customers happy.
Now it’s time to think about another complicated aspect of order fulfillment: shipping. That’s where technology like EasyPost comes in. EasyPost’s API suite offers solutions for carrier comparison and rate shopping, label generation, address verification, package tracking, and more. It allows businesses of all sizes to automate shipping, saving time and money and increasing order accuracy.
Ready to streamline your order fulfillment?
Talk with one of our logistics specialists to learn more—or simply sign up for free!