In the retail business, having the right inventory and the right amount of it is very important. When sales of a product pick up, you would want to make sure you always have enough stock so you don’t miss the chance to sell and make money. But at the same time, you don’t want to have too much inventory because that can hurt your profit margin. Because of this, you need to be careful when setting your Open To Buy (OTB) budget for each product based on historical data or how much you are willing to invest at first.
Once your Open to Buy budget is set, you can start the process of sourcing. If you don’t already have a supplier that you work with, Minimum Order Quantity (MOQ) can help you choose one. If you have worked with your wholesale supplier for a long time, you probably know what their MOQ is. Depending on how well you know them, you may be able to negotiate some room for flexibility.
In this article, we’ll explain what MOQ stands for, what factors you need to think about when figuring it out, and how the calculation itself works. Also, we will tell you how to get the most out of the MOQs that your suppliers set.
What does “minimum order quantity” (MOQ) mean?
The Minimum Order Quantity of a product is the fewest number of that product that you can order or buy at once. This is mostly done by manufacturers and suppliers when they sell their goods to retailers or resellers in a business-to-business (B2B) transaction. The minimum order quantity (MOQ) is set by suppliers and manufacturers so that they can keep making money and make sure you buy enough for them to also make money and keep prices low for their resellers.
Most of the time, the MOQ depends on the type of product and can also be different between suppliers. Products that cost more to make and have a higher price tend to have a lower MOQ, while those that are cheap and easy to make tend to have a higher MOQ. In this article, we’ll explain how you, as a buyer, can deal with MOQs.
How do I figure out the Minimum Order Quantity?
Now that you know what “MOQ” stands for, we can talk about how it is calculated. There is no right MOQ because every business is different, so we can’t come up with a solution that works for everyone. You should know that there is usually a trade-off between having a higher minimum order quantity (MOQ) and paying a higher price for a smaller order. Even though there is no exact formula for figuring out the Minimum Order Quantity, you can get a better idea of what it means by following the steps below. This will give you a place to start.
Determine your demand
Demand can be hard to figure out, especially when you are just starting your eCommerce business, but you can always start with industry benchmarks. To predict your demand, you need to think about the type and seasonality of your product, as well as the competition and other things. The goal is to find the best balance between supply and demand so that you can make the most money from the items you buy. If your demand goes up, you also need to think about the things that affect how long it will take your supplier to give you a reorder quantity. These lead times include the time it takes for the goods to get to the warehouse, the time it takes to process them, and any other possible delays that could affect how soon you get the goods.
Know your point of break-even.
If you are lucky enough to work with suppliers who have a very low minimum order quantity, you will need to come up with a number that will be your MOQ. In this case, you should start by figuring out your break-even point, as this will have a big impact on how many goods you want to buy. When your sales equal your costs, you’ve reached the break-even point. After this point, you’re not losing money by running your business. With this calculation, you can figure out the point or number of goods sold at which your business starts to make money for you. To figure out your break-even point, you need to know the price you pay for one unit of the product you sell, your fixed costs, like rent or storage, and your variable costs, like marketing. Here’s the formula you should follow, Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit).
Know how much it will cost to store and warehouse your goods.
Many new businesses make the mistake of not paying enough attention to how much it costs to store their inventory. This can hurt their profit margin in the long run if they can’t sell a product in time. Some things may cost more to store than others because of their value, size, date of expiration, or special needs once they are stored. The cost of keeping your inventory can be a huge burden on your business if you don’t think about everything before you buy a lot of it. You’ll make more money if you store the goods that cost you the most for the shortest amount of time possible and give yourself more time to sell the ones that cost you less to store.
Set up your OTB and decide on a MOQ.
After you’ve done the steps below and thought about everything, you can now figure out how much you’re willing to spend on your next order. This amount is called your “Open to Buy” amount. This should be looked at every week based on how much you were able to sell the week before. You can figure out your ideal Minimum Order Quantity once you know how much inventory you can buy while making the most money possible and keeping a steady cash flow. Sometimes, the minimum order quantity (MOQ) that your supplier gives you will be much higher than what you would like to buy. In this case, you have to decide if it’s worth the risk to invest in a larger stock, or if you’d rather find another supplier who works with lower minimum order quantities (MOQs).
What does MOQ mean to you, and how can you as a buyer work around it?
If you run a small eCommerce store and are on the buying side, minimum order quantities or minimum spend thresholds might seem like a nightmare. But keep in mind that most of the businesses like yours are partnering with wholesalers that also have a MOQ requirement so you will also surely be able to navigate and work around these numbers. In the next section, you’ll find some advice on how to deal with MOQs.
Try to get a better price.
If you think your supplier’s minimum order quantity (MOQ) is a little higher than what you wanted to buy at first, but you really need inventory, you can try to negotiate a better deal. On your first wholesale order, your supplier might not be able to give you a better deal. However, after you have worked with them for a long time, you might be able to get a deal. Especially if you are committing to buy more, your supplier might give you some extra discount. Or, you might be able to pick and choose different styles to meet the MOQ.
Get rid of the SKUs that aren’t selling.
When you have a wider range of products in your store, you always run the risk of keeping stock that sells slowly or, worst case scenario, doesn’t sell at all. This way, you’ll just have to pay for the cost of storing it and never get your money back. If you don’t want to spend money on the MOQ of slow-moving SKUs, you will have to keep an eye on your sales and see how each product in your line is doing. This will help you figure out which ones you do not want to invest in again. Entrepreneurs often make the mistake of overestimating how much people will want a product in different colors or that is only slightly different from another product.
Buying from a wholesaler is a good idea.
When you buy directly from a manufacturer, you may find that the minimum order quantity (MOQ) is too high for your business size and stage. You can easily avoid these by finding a middle man who can sell you the same products. Multi-brand marketplaces and wholesalers like Dropship Corporation have much lower Minimum Order Quantities. At Dropship Corporation, the minimum order quantity (MOQ) for styles you choose and mix yourself starts at 1,000€/$1,200. Also, you can choose from more brands and styles this way than if you bought a lot of one style directly from the manufacturer. Also, if you buy from a wholesaler and buy more than one style, you’ll be able to sell to your customers faster because you’ll have a wider range of products for a low investment.
Pay attention to how fast your items sell.
Due to the Minimum Order Quantities that your supplier sets, when you buy a bigger amount of inventory, you have more pressure to sell it faster because you have already spent more money on it. Even though this doesn’t mean you have to have flash sales or clearances to get rid of your stock as quickly as possible. Not only would this hurt your profits, but it would also hurt the reputation of your store or the brands you sell. Because of this, you should come up with creative ways to get customers’ attention and persuade them to buy. If you want to learn how to drive and increase sales in your eCommerce store, you should read our last article, which gives you 80 useful tools to do so.
Set up good relationships.
In all parts of business, it is important to build a good, long-term relationship with your wholesale supplier. If you have a relationship based on trust, you will automatically be in a better position to negotiate, not just about MOQs but also about other benefits, so make sure you pay attention to this as well. When you first start working with a supplier, you can do this by telling them about your business idea and getting them interested in your brand.
Once you’ve done this, make sure your eCommerce business keeps growing. The more orders you get, the more you will order from your supplier, which will be good for both of you in the long run. They’ll be happy as long as your business keeps making them more and more money. Make sure you pay your supplier on time so you can build a good “credit score” with them while you work on increasing your sales. Think of your relationship with your supplier as a partnership, not just a transaction, and treat all of their employees well and with respect. Over time, this will make sure that your supplier always has your back, even in tough times like the ones we’re in now, which is a very valuable thing to know.