A Simple Guide to Understanding Minimum Order Quantities (MOQs) in Retail

Having the right amount of inventory is vital to sustaining a business. You need to meet demand, but you don’t want to have to hold onto stock you can’t sell. In a perfect world, you would set up reorders on a schedule, and in quantities, exactly designed to meet customer needs. Purchasing, however, isn’t always that simple.

It’s enough of a challenge to find suppliers who sell exactly what you need at a fair price. Many manufacturers and suppliers also set minimum order quantities (MOQs) to ensure they’re making a profit.

This can be an obstacle or an opportunity. Here, we’ll explore what an MOQ is, the impact of MOQs on your inventory, the benefits of MOQs, how suppliers calculate MOQs, and tips for optimizing MOQs.

What is minimum order quantity (MOQ)?

Minimum order quantity, MOQ for short, is the quantity of products you must purchase in one order from a supplier. It can be based on the number of units or the total order value. Here’s an example:

You buy pens at $.20 each. Your supplier’s MOQ for pens is 1,000 units. This means you’ll have to spend a minimum of $200 on pens per order. 

Suppliers set MOQs to avoid wasting time and resources on orders that deliver little or no profit. Different types of products will require different MOQs; an item that costs a lot to produce is likely to have a lower MOQ than products that are easy and cheap to produce.

What is the impact of minimum order quantity on inventory?

Supplier MOQs, high and low, will have a major impact on your inventory. They will affect the number of days you hold stock, the frequency of your purchase orders, and the space available in your warehouse. If you can’t meet your supplier’s MOQ, you may have to look elsewhere or pay a surcharge to purchase less than the minimum order quantity.

High MOQ

If you work with suppliers that have high MOQs, you’ll need to order a sizable amount of inventory, which might involve longer lead times. Due to the larger order requirements, your stock will take up more space in whichever inventory storage solution you use and also tie up a substantial chunk of your working capital. You also run the risk of holding onto the stock for too long, making it obsolete. 

The plus side is that your administrative costs will be lower, as your orders will need to be placed less frequently. You’ll also have more opportunities to buy bulk quantities at lower prices and there will be less chance of running out of stock.

Low MOQ

Ordering products from suppliers with low MOQs means you’ll have less inventory on hand, but—depending on customer demand—you may need to restock more often, potentially increasing administrative or shipping costs. When ordering small inventory quantities, there’s also the risk of not having enough stock on hand. In unanticipated moments of high demand, you may lose out on sales.

But a low MOQ reduces your working capital investment. This way of working also decreases the chance of your stock becoming obsolete or irrelevant over time. Typically, low MOQ products will have higher margins.

Benefits of MOQs

MOQs are not only beneficial in helping suppliers maintain healthy profit margins, but they can also help you improve inventory control and keep purchasing costs down.

Let’s take a look at more benefits: 

Benefits for suppliers

• Better cash flow. When setting MOQs, suppliers take their total cost of inventory into account and pair it with any other expenses they have to pay before reaching the desired profit level. When this is managed well, their cash flow is healthier and more predictable.
• Reduced inventory costs. Some suppliers don’t even produce goods until a buyer who can meet their MOQ makes a purchase. This keeps stock out of their warehouse and reduces both inventory and manufacturing costs. 
• Increased profit margins. As noted, supplier MOQs are usually set up in a way that ensures a certain profit margin. Often they will only order new stock when their sales reach a level that creates an operating profit. This means that even a relatively low MOQ will offer the safety net they need.

Benefits for buyers

• Saving on bulk purchases. If you work with suppliers that have MOQs, you’ll know you’re getting the best price per unit. Buying products in bulk results in savings and more profit on each unit sold. 
• Enhanced relationships with suppliers. Your ideal purchase quantity may differ from your supplier’s MOQ. This means you’ll need to work with your supplier to reach a solution. These negotiations can create stronger relationships.

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Types of MOQs

MOQs can be simple or complex. Your supplier will have different economic constraints associated with your orders, depending on the products they sell. Machinery, materials, shipment costs, bookkeeping costs, and billing costs are just a few examples. 

MOQs will either have a limit on one constraint or on multiple constraints. Simple MOQs usually have just one lower limit. As noted, this will usually be a minimum value or quantity of units. 

Complex MOQs, on the other hand, have multiple limits. These can include the costs discussed above as well as minimum amounts of parts or materials.

Simple MOQ

As the name suggests, simple MOQs are easy to understand. You’ll need to agree on a minimum spend or minimum quantities before you place an order with your supplier. 

A perfect example of this might be a supplier of personalized merchandise. It wouldn’t be worth the resources needed to add a logo or color scheme to a mug or a pen if the buyer was only looking to purchase a small number of items.

Complex MOQ

Two or more requirements will be in place when you’re looking to buy from a supplier with a complex MOQ. You might have to reach a minimum quantity of units as well as a minimum order value, and it might be even more complex than that. 

For example, let’s say you’re sourcing fabric for your clothing line, the supplier might require an MOQ in yards or meters of fabric per color. They will set up an MOQ that takes minimum spend, minimum quantities, and minimum measurements of fabrics into account. As the buyer, you’ll need to match all the conditions to be able to place an order.

How to calculate minimum order quantity

1. Determine demand
2. Calculate holding costs
3. Find the break-even point
4. Set minimum order quantity

As a retailer, you may have occasion to set up your own MOQ for certain products. 

For example, if you design and manufacture the products you sell in-store or online, and want to broaden your distribution by selling to other retailers at wholesale, you’ll want to set minimum order quantities for the wholesale orders. Understanding how MOQs are calculated will also give you a better idea of how your purchasing conditions may fluctuate.

There is no one-size-fits-all formula when it comes to calculating MOQs. Not every industry or product is the same. Suppliers work with fluctuating prices on raw materials and component parts, so MOQs are likely to fluctuate too.

Suppliers will collect extensive data to determine the point at which an MOQ makes the most money. These are some key parameters that will feature in their calculations.

Determine demand

Demand will vary and be influenced by a variety of factors, including product type, competition, and seasonality. Suppliers review historical data to forecast demand and use it to define the inventory quantities needed to satisfy market fluctuations. 

Calculate holding costs

Depending on the products sold and their storage requirements, the costs to store products will vary. Refrigeration, for example, will incur energy costs, and odd-shaped items may take up extra space. 

No matter the variations, suppliers will not want to store products for too long, as their finances will benefit from a quicker turnaround. This is worth remembering when you’re looking for deals.

Find the break-even point

Whether you want to set minimum order quantities for wholesale purchases of your products, or understand when you’ve earned back customer-acquisition costs for direct-to-consumer orders, knowing your break-even point is key. This is when your product sales (or your supplier’s sales) are equal to business expenses.

When it comes to MOQs, suppliers consider how many items they need to sell before they can break even and eventually make a profit. Their costs generally include the price of materials or supplies as well as labor costs, storage costs, customer acquisition costs, and anything else directly connected to a sale. 

Set minimum order quantity

Once suppliers determine demand, calculate holding costs, and find a break-even point, they set their MOQs for each product type. Having this in place weeds out customers who want to buy lower quantities, which leads to unprofitable orders.

To persuade their customers to buy in higher quantities, suppliers sometimes offer incentives like bulk-buying discounts. This helps their inventory management and your bottom line.

Tips for optimizing MOQs

• Free shipping thresholds for customers
• Create incentives to spend more
• Remove slow-moving stock
• Regularly review supplier relationships
• Automate with technology

As we learned earlier, there are a few benefits of having MOQs. But if you’re required to purchase a certain quantity from suppliers, you’ll also want to make sure your customers are incentivized to buy from you, that your stock is fast-moving, and that you’re getting the best possible deals from your suppliers. 

Here, we’ll look at some tips to optimize your MOQs:

Free shipping thresholds for customers

Shipping orders to customers for free after they spend a certain amount is known as a free shipping threshold. To advertise this incentive, you could add a banner to your website that says, “Spend $50 and enjoy free shipping.” Or you could convert first-time buyers by offering to ship their first order for free.

Another example could be to charge shipping until the customer reaches a specific number of orders, and then give them free shipping on their next order. Regardless of the strategy you use, offering free shipping can help increase sales and improve inventory management. 

Create incentives to spend more 

You can encourage end-consumers to spend more with incentives like lower prices for items purchased in multiples, or create product bundles to increase average order values. This strategy of reducing the per-item price if the customer buys more is one way to move inventory faster. 

And if you’re selling your products to retailers at wholesale, you can set an MOQ per style or collection, but also create tiers. For example, buy 10 pairs of jeans and the cost is $10 per pair, buy 20 pairs of jeans and the cost is $8 per pair, or buy 30 pairs of jeans and the cost is $6 per pair. The more units the retailer purchases, the less it will cost per pair and the higher the margins will be. 

Remove slow-moving stock

As we mentioned earlier, the cost of storing stock will vary depending on the product type. No matter what items you’re selling, however, holding on to stock for too long will always eat into your profits. 

Keep a close eye on which products are selling quickly and which products are sitting in storage for a long time. It’s much easier and more cost-effective to manage fewer items. 

If you’re not selling a particular color or variation of a product type, do you need to keep it in your inventory? You can run a promotion to try to get rid of it and in the future, look to buy alternatives or look for a supplier with a lower MOQ.

Regularly review supplier relationships

Some suppliers increase their MOQs or have a price point that makes it difficult for you to make a profit. If you have a strong relationship with them, your best option is usually to negotiate. But when that becomes impossible, it’s time to look at other options.

PRO TIP: Always try to negotiate supplier pricing before you start the relationship (even if it’s $1 or a few cents less than the listed price). The supplier is likely expecting some negotiations, and they will set the tone for your relationship. The worst-case scenario is that the supplier will say no.

Automate with technology

ERP (enterprise resource planning) and MRP (material requirements planning) platforms have automation at their core. Using the analytics these platforms offer makes it easier to manage your purchases and keep track of supplier MOQs. And because the software provides near real-time data, you can quickly change your buying habits to meet current needs. 

Use MOQ to your advantage

Now that you know what MOQs are, how they’re calculated, and the impact of high and low MOQs on your inventory, you’re ready to start sourcing suppliers, negotiate pricing, and build long-term relationships.

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