Ramin, a Managing Partner at SKU Agency focused on growing your business through strategy, technology & design. Ramin loves to devour business books, podcasts, and blogs. In his spare time (which is minimal) he enjoys hanging out at home with his wife and three kids - and occasionally riding the Peleton.
Minimum order quantity, commonly known by its acronym MOQ, is a sales system that can help your e-commerce store make profits. The term itself describes the minimum number of units customers must order, or the lowest price threshold their order must meet.
MOQ can be a useful tool for wholesale businesses, as it makes every sale financially worth the effort required to complete it. When you initiate a minimum order quantity in your store, it can cover the cost of production, shipping, and other overhead expenses. When calculated correctly, it can also ensure your business is profitable.
Other types of e-commerce businesses may encounter MOQs when buying products and raw materials from wholesale merchants. This pricing system is an important part of the supply chain, and all business owners should understand it.
Wondering how to make MOQ work for your small business?
Read on to learn all about it and how to use it effectively in your store.
MOQ is very beneficial for wholesale e-commerce businesses that sell bulk supplies to other companies. This is because it’s designed to cover manufacturing costs, labor fees, and inventory management.
If the items you sell cost a lot to produce, MOQ requirements help you cover production costs and ideally make a profit. It ensures you only accept profitable orders, so you go beyond breaking even and grow your profit margin.
If you’re a new business, make sure your minimum order quantity is realistic for your customers. It may take some trial and error to identify the sweet spot of stable sales and profitability.
Your MOQ can also serve as a form of quality control. It can stabilize the cash flow your business needs to create and sell safe, quality products. When expenses are not covered, it’s easier to overlook quality and safety in an urgent bid to drive sales.
How to Calculate Your MOQ
MOQs vary depending on the product and industry. It may be as high as 1,000–10,000 units or as low as one unit per order.
Low MOQ is common for smaller wholesale suppliers. High MOQ, on the other hand, is normal for large-scale wholesalers that sell supplies for other companies’ production systems.
Let’s say your e-commerce business sells screen printed T-shirts, for example, and the wholesaler who supplies your shirts has an MOQ of 200.
How did they choose that number?
Well, that’s likely the minimum amount of shirts it takes to make a profit. The labor, cotton, dye, and admin work that went into making and selling that shirt are all embedded in the MOQ. If they sold you any less, they’d probably lose money.
Let’s talk about how to crunch your own business’s numbers and use them to calculate a profit-generating MOQ.
1. Identify Demand
You can figure out the demand for your product by considering the product type, season, location, and past sales.
Start by reviewing your sales figures to calculate your average order quantity per product. Determine how much your business makes per product and per customer, then use that to determine your target profit margin.
2. Find Your Break-Even Point
Your break-even point is the amount at which your revenue covers the costs of operation and manufacturing. It can also describe the point at which revenue from a particular product covers its manufacturing costs.
You can find your break-even point by using this equation:
Fixed costs + variable costs ÷ net revenue per unit sold
Then, let’s say you make an average profit of $1 on every unit you sell.
That means, as long as your variable costs stay relatively steady from month to month, you’d have to sell ten units to break even.
Figuring out at what point you break even will help you determine a profit. Setting an MOQ just above the break-even point is a good starting point.
3. Determine Variable Costs
Unlike fixed costs, variable costs are directly associated with production. Calculating how much it costs you to build, stock, and distribute inventory is important in determining your MOQ.
It costs you to source the raw materials used to make your goods. Be sure to calculate the total price of the raw materials in each of the products you sell, as well as the labor it takes to make them.
You also have to store your products until they’re sold. The cost of storage is determined by each product’s size and any special storage requirements, like refrigeration.
You should also consider distribution costs. Does your business ship its own products like Amazon, or does it use dropshipping services like Alibaba and AliExpress?
Labor, raw materials, storage, and distribution fees are part of your company’s variable expenses. These figures should directly determine how much you charge for each product.
Make MOQ Pricing Attractive to Your Customers
An MOQ not only benefits your business — it can also benefit your clients by meeting the demands of their business at a fair price.
The problem is that the benefits may not be obvious to them at first. A potential customer browsing your store may be put off by seeing your minimum order quantity. New business owners may be reluctant to purchase multiple units, as they have their own budgets and demand forecasts.
But there are ways of easing a customer’s apprehension. This is where communication and value come into play.
Proving to clients how your products and pricing makes their business stronger can make your MOQ easier to swallow.
When talking to clients about MOQ, keep these tips in mind:
Like bulk pricing, MOQ allows clients to stock up on your products at a wholesale price, saving them money in the long run.
Set up a trial period for new customers. This way, they can understand how the pricing works for your business and have a chance to see how it benefits their store.
Your MOQ should always be negotiable. Stay flexible and consider tailoring prices/limits for each customer.
By communicating effectively and expressing your product’s value upfront, clients will likely see how the MOQ benefits them, too. They may also be more likely to place large orders from your store moving forward.
Best Tools for Minimum Order Quantity
You don’t have to go it alone. Many e-commerce platforms have tools that make initiating MOQ requirements simple and effective.
Here are some of the best tools to implement it in your online business. Whether you use Shopify, BigCommerce, Magento, or WooCommerce, these resources help get your MOQ pricing system up and running.
For Shopify Store Owners: OrderLogic
OrderLogic lets you define minimum and maximum order amounts and quantities in your Shopify store.
It’s completely customizable, allowing you to set individual and predetermined quantity multiples for each item.
On the frontend, customers won’t be able to click the buy button until their order reaches your preset minimums.
On the backend, this app is easy to set up and requires no coding skills.
The minimum or maximum number of items in an order
The total price threshold of an order
The number of products in a set
Customers will not be able to complete an order until these values are met. This app is also easy to use and works with any BigCommerce template.
For Magento E-commerce Stores: Limit Quantity Per Category
If you use Magento, you know it only lets you set minimum and maximum quantities per product.
But its Limit Quantity Per Category extension lets you set these quantities based on customer groups. This allows for better customization options for your clients and their specific business.
Customers cannot check out until they meet your preset MOQ conditions.
Since the extension is open source, you can tweak its code to ensure it suits your store.
WooCommerce Users: Min/Max Quantities
WooCommerce developed this extension so customers can only place an order when they meet your minimum or maximum quantities and/or prices. You can set MOQs for orders and specific products, including products with different variations.
Min/Max Quantities has a simple, intuitive interface that will blend seamlessly with your existing store.
Ordering From a Company With an MOQ? Here Are Some Tips
While we’re on the topic, let’s talk about buying from stores with minimum order quantities.
If your supplier’s MOQ is more than you want to buy, remember this:
MOQs are not necessarily set in stone. There’s always the opportunity to negotiate or ask for a lower MOQ.
If you don’t want to buy a large quantity, contact the company and ask about buying a smaller amount of product. The worst they can say is no.
You may also be able to get a good deal by buying their unsold backstock. Every business has to deal with the fallout of miscalculations, and surplus inventory is often a byproduct of this. This inventory might be exempt from their MOQ.
So, ask if they have any excess stock you can buy. The wholesaler may strike a one-time deal with you to offload the surplus.
If these items aren’t selling, they’re simply taking up valuable storage space. With a special discount offer, you save money and they clear out their inventory.
Same goes if the manufacturer has stock that isn’t moving or has canceled orders piling up in storage. They may sell it to you without an MOQ to make a sale and push out stalled inventory.
Remember that in business, good relationships are a two-way street. When the wholesaler considers your business needs, be sure you consider theirs, too.
You may think that a minimum order quantity will turn off potential buyers. But as we’ve seen, you can actually use it to improve your sales, cover your expenses, control quality, and strengthen customer relationships.
It can mean the difference between profitability and a weak sales quarter.
Remember these five tips, and your online store will be well on its way to higher profits. Better yet, you’ll gain new insights into your business’s operations and what it’ll take to be a success story.
Interested in a custom integration that can simplify your Shopify store’s MOQ efforts? Contact us today.