What Is Minimum Order Quantity (MOQ)?

Sharline Shaw

Have you heard a phrase called minimum order quantity or moq in the sourcing industry? You might have felt confused about this slightly hard-to-comprehend term. 

If yes, you just landed in the right place. 

Once you finish reading this article, you’ll clearly understand a minimum order quantity or moq and why you should care about it. 

As an expert in the sourcing industry, we have compiled all the much-needed information about the term and transformed it into an easy-to-understand article.

This article shall discuss the minimum order quantity moq and its further aspects. Like:

  • Why do suppliers use them?
  • Types of MOQ
  • How does it work?
  • Its Pros and Cons

And more!

Let’s get started!

What Is Minimum Order Quantity

What Does MOQ Mean?

MOQ stands for minimum order quantity. It’s the minimum number of units of a product required to purchase at one time while placing your order.

If a manufacturer’s MOQ is 2000 units, it’s the minimum quantity or minimum amount of goods you can buy from them. Besides the number of units, a brand can also set products of a set price range as the MOQ. For example, if the MOQ of a brand is worth $500 products.

So, by now you have understood MOQ’s meaning, let’s proceed further.

What Is Minimum Order Quantity

Why Do Suppliers Use Minimum Order Quantity (MOQ)?

Many wholesale suppliers or manufacturers will institute an MOQ to commit the buyer to purchase enough products, which can be two things:

  1. Cost-effective in production 
  2. Makes a profit 

Mainly, the reason why many suppliers and manufacturers use MOQ will differ. However, if we had to state one solid basis for the usage of MOQ, that would be – Sales margin. We can define sales margin as the profit generated by selling a service or a product. They also use MOQs to preserve their cash flow and have peace of mind.

MOQs vary based on products as well.

How Does It Work?

A manufacturer mainly determines an MOQ. However, there are two cases a manufacturer can define the MOQ:

  1. It can be the break-even point and a tiny percentage of profit to produce finished goods.
  2. In addition, the manufacturer may be required to meet specific requirements by the supplier. Therefore, they also need an MOQ.

For Other Companies: MOQ may be based on sales order value (to justify the sales and customer service experience).

For More Prominent Manufacturers: An MOQ makes sense for large manufacturers. They do not need to go beyond a certain point since they already have volume buyers.

There’s no single set formula to determine the mechanism of how EXACTLY MOQ work. The general rule of thumb that most companies use is that they look at the lowest production volume for finished goods and maintain current efficiency levels. Product-specific issues impact MOQs. It must also include the following:

  • Value 
  • Holding cost of raw materials

After determining this, they can decide how much profit margins they will cede to capture the order without going too far and losing money.

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Types of MOQs:

MOQs indicate the economic constraints that many manufacturers or suppliers in the manufacturing business are bound with. These can include:

  • Raw materials 
  • Machinery 
  • Other costs of executing the shipment cost – shipment costs

Below, we’ll discuss two of the main types of MOQs: simple MOQs and complex MOQs.

  1. Simple MOQ:

As the name already implies, simple MOQ is the amount that has one lower limit. Either in a dollar amount or a number of units, etc. They are sometimes called “Eaches.” Companies that are not retailers often deal with a simple MOQ.

With simple MOQs, the small businesses dealing with small MOQs have only a single restraint on orders. 

  1. Complex MOQ:

Complex MOQ can have several limits. They can include:

  1. Minimum parts or materials
  2. Dollar amounts or finished products

Unlike simple MOQs, complex MOQs have two or more requirements for orders. 

 Pros and Cons of MOQ:

Pros and Cons of MOQ

Minimum order quantities have some pros and cons for buyers and suppliers. Below we shall look at a few of them:

Pros of MOQs:

  • The buyer’s best bet is to lock down a unit at its the best price.
  • Once both parties agree on a minimum order quantity, buyers can get maximum discounts.
  • MOQs augment the margin of profit per unit.
  • If the price and size of the order are managed well, MOQ business model can help suppliers have a healthy and predictable cash flow.
  • MOQs lower the reliance on warehouse space and inventory costs.

Cons of MOQs:

  • Small business owners and retailers might find MOQs challenging while starting up their businesses.
  • MOQs have a higher set standard to kick start the deal. So the retailers might have to order an unnecessary amount of products. That’ll eventually increase the upfront cost.

High MOQ vs. Low MOQ:

With high MOQ, the inventory must be held in much higher minimum quantities. Conversely, with the low minimum order quantity or low moq, the inventory has a lower minimum order quantity.

Below is the breakdown of the impact high minimum order quantities and low minimum order quantities have on inventory:

  High MOQ’s Impact on Inventory  Low MOQ’s Impact on Inventory
An increased investment of working capital is required to reach the MOQLow investment of working capital is needed to reach the MOQ
Higher holding costLower holding cost 
Higher risk of obsolescence Lower risk of obsolescence 
Lower risk of stock-outsHigher risk of stock-outs
High holding cost Lower holding cost

4 Steps to Calculate Minimum Order Quantity:  

You can use the four steps we have mentioned below to calculate your MOQ:

Calculate Minimum Order Quantity

Step 1: Determine Demand

First off, you’ll have to determine the demand before purchasing your manufacturer’s inventory. While forecasting the demand, you can take a few things into account. Like:

  • Product type
  • Competition
  • Seasonality 

Determining this data can help you decide the amount for your next purchase order and inventory forecasting. You might also consider the entire manufacturing timeline for your inventory, shipping costs, delivery costs, transit time, and other potential delays. Here are the tips for you to determine demand like a pro:

  1. Stay consistently in touch with your supplier(s).
  2. You must have enough safety stock to manage any significant fluctuations in the market.
  3. Review your sales forecasts often (weekly) and keep adjusting production quantities.

Step 2: Calculate Your Break-Even Point 

To determine your MOQ yourself, you also need to calculate your break-even point.

On DTC orders, the break-even point can be determined on your second transaction. This is because you have already recovered the customer acquisition cost

 when your customer returns through email marketing efforts. 

The lowest price per unit you are willing to charge for higher-order values is essential when dealing with wholesalers. 

Step 3: Understand Your Holding Costs

Your holding cost is the cost of storing your unsold inventory. The holding cost can be too expensive for some products considering their size, duration, and specific warehouse requirements. Therefore, it would be best to ensure that such costly products are not kept in your inventory for long.

Step 4: Come up with Your MOQs

Lastly, you have to come up with your MOQ. Here’s an example:

Suppose your product has a relatively high demand. If the average purchase rate of your partners is 200-units per order and you have to sell 150 units to earn profit. So, if your customers have been buying 200-units in the past, your MOQ can be 200-units per order. Just to be safe, you could reduce it to 150.  Up to you!

Coming up with your MOQs largely depends on how many units you sell!

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4 Tips to Implement An MOQ:

Have you implemented your own moqs for your business? Great! You can maximize your MOQ implementation by following these few tips.

  1. Encourage a Higher Spend on Your Orders:

You can encourage retailers and wholesale suppliers to spend higher on your orders by charging less per unit in exchange for a higher spend. Or, you can offer them free shipping after spending a certain minimum spend amount.

  1. Keep Your SKU count Simple.

Don’t go crazy about your SKU count. A simple and minimal SKU count helps you with inventory forecasting.

  1. Enhance Your Inventory Turnover Ratio

You’ll have to seek and invent creative ways to sell, bring yourself more sales, retain customers, and enhance the turnover ratio for your inventory.

  1. Find other Distributors and Suppliers 

If your supplier’s minimum order quantity or minimum amount is higher than your range and they are unwilling to negotiate, you are free to keep looking for better options.

Minimum Order Quantities (MOQ) Examples:

Below are a few typical examples of minimum order quantities for different products:

  • Clothing:

500-1000 pcs/order

500-1000 pcs/color (Custom Order)

100-300 pcs/color (Standard Color)

100-250 pcs per size

  • Electronics:

500-100 pcs/order

500 pcs per product 

500 pcs per color 

FAQs about Minimum Order Quantities (MOQ):

What are the Best Tools for moq Minimum Order Quantity?

Cogsy is the best tool to manage your MOQ. It gives you real-time insights and helps you use your data in your favor.

How to set MOQ as a seller on Alibaba.com?

On Alibaba.com, it’s easy for you to set a MOQ as a seller using the intelligent product posting tool. You can also set ladder prices based on volume and simplify operations.

How to set MOQ on Shopify?

You can set your MOQ on Shopify using the steps below:
1. Open the Wholesale Channel.
2. Click “Preferences.”
3. Select “Set a Minimum Purchase.”
4. Enter your MOQ. 

Conclusion: 

Minimum order quantity (MOQ) can be both exciting and frustrating.

MOQs can prevent some startups from starting the business and even working with the manufacturers due to the cost to manufacture the inventory, getting up the business, and running it. If they spend on a higher MOQ, they might lose money.

However, it can also be helpful for many small businesses or online store owners in the long run because it’s way better than buying a smaller inventory batch at a higher per-unit cost.

Got more queries about MOQ that are unanswered here? Visit our services page, and we shall be more than happy to help you with your questions.

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sharline

Article by:

Sharline Shaw

Hey I'm Sharline, the founder of Leeline Sourcing. With 10 years of experience in the field of sourcing in China, we help 2000+ clients import from China,Alibaba,1688 to Amazon FBA or shopify. If you have any questions about sourcing , pls feel free to contact us.