How minimum order quantity works and why it's beneficial
Minimum order quantity (MOQ) is a limit your business or suppliers might set where orders must be over a certain quantity or volume to be fulfilled. While turning away orders can seem counterintuitive, setting an MOQ can be beneficial by minimising per-unit costs for production and delivery.
In this guide, you'll learn the meaning of MOQ, the different kinds of MOQ and tips and examples for calculating them for your products.
What is minimum order quantity (MOQ)?
MOQ, or minimum order quantity, is the lowest number of units you're willing to sell in a single order. You can set your MOQ based on cost or quantity – you might have a MOQ of either $500 worth of widgets or 50 widget units.
Why do businesses set MOQ?
Businesses set MOQ to ensure filling an order is worth their time and effort. The MOQ is set so that each order covers the cost of materials, machinery, shipping and admin. For example, if your profit margin is very tight, say $0.10 per unit, selling 10 units will only make you a dollar, which may not be worth the effort of fulfilling the order. With an MOQ of 1000, you'd make at least $100 per order.
It also helps businesses avoid extra costs. For example, a wine wholesaler will want to avoid the time it takes to split a case, so their MOQ would be six bottles.
What are the types of minimum order quantity?
There are two types of minimum order quantity: simple and complex.
Simple MOQ
A simple MOQ usually has just one limit – a set minimum dollar or unit quantity per order.
Complex MOQ
Complex MOQs have two or more requirements in place. Say a food manufacturer can only buy chocolate in 10-kilo blocks. They may set a different minimum spend on orders for each different type of chocolate bar, because setting up the production line has a fixed overhead. They may also require orders in unit lots that use all ten kilos of chocolate.
How does minimum order quantity affect inventory?
It's a good idea to weigh how a high or low MOQ will impact your inventory management. It’s important to balance your MOQ with demand, as well as with your strategic goals.
Effect of a high MOQ
With a high MOQ, you'll be selling in larger quantities, so to avoid long lead times, you'll need more inventory on hand and higher inventory days to fulfil orders. On the one hand, this will tie up more of your working capital in inventory and increase the risk of it going out of date. However, you may offset this with lower administrative costs, bulk savings and decreased risk of stockouts. In many cases, a high MOQ will go with a lower-priced product.
Effect of a low MOQ
With a low minimum order quantity, you'll likely receive smaller orders, so you may be able to hold less inventory and still satisfy demand. A low MOQ can help you attract a broader customer base and increase sales but might also come with higher administrative costs with more risk of running out of stock. Lower MOQs tend to come with higher-priced items.
Benefits of a minimum order quantity for suppliers
If you're supplying products, setting a minimum order quantity gives you lower cost-per-unit, which can improve profit margins and cash flow management.
Improved profit margins
An MOQ can help ensure you only fulfil orders that will return a worthwhile profit due to higher unit numbers and orders where several combined factors make production especially efficient.
Improved cash flow
When combined with well-managed pricing, an MOQ also helps keep cash circulating in your business.
Lower inventory costs
An MOQ can make it easier to predict demand so you only hold the inventory you know you'll need.
Economies of scale
An MOQ ensures you avoid very small orders and encourages customers to place larger orders. This means you can produce or supply in larger quantities, which gives you economies of scale and a lower cost-per-unit.
Benefits of a minimum order quantity for buyers
Buying from suppliers with MOQs also has benefits.
Bulk savings
Suppliers will often pass on bulk-buy discounts so you get the best price per unit.
Stronger supplier relationships
When a supplier has set an MOQ, it makes it easier to work together to benefit both of you. It gives you a clear understanding of what your supplier needs to keep their business strong and healthy, and any negotiations will help strengthen that relationship.
What affects a minimum order quantity?
Many factors can affect a minimum order quantity.
Profit margins
If you sell products with a lower margin, a higher MOQ can help ensure you break even. A lower MOQ may suit higher-margin products.
Order volumes
You should also consider your average number of orders when setting your MOQ. If your order volume is high, you may still be able to get economies of scale by producing or buying in bulk, even if each order is relatively small. This lowers your cost-per-unit, and allows for a lower MOQ too. If you tend to have low order volumes, you'll need a higher MOQ to help maintain economies of scale.
Operational efficiencies
An MOQ is a way to avoid waste and additional costs in production or supply. If you've managed these inefficiencies by improving your operations, you can offer a lower MOQ.
Tips on calculating minimum order quantity
To calculate your MOQ, you'll need to consider a range of factors, many of them unique to your industry or business. You'll also need to regularly review your MOQ to align with changes in your business, your industry and the broader market.
Identifying your break-even point
For each product, determine how much you need to sell per unit to break even, then check that your MOQ is higher. Here's the formula:
Break-even point (in units) = Fixed costs/(sale price per unit – production cost per unit)
For example, you sell T-shirts for $10, but it takes $5 of materials and labour to make one, leaving $5 per T-shirt towards $100 fixed costs like rent, salaries, insurance and more. Divide 100 by 5, and you get 20, your break-even number.
Forecasting demand
A sales forecast can help you predict future demand. If your customers have been making orders of 100 units on average, introducing an MOQ of 1,000 units may send them elsewhere.
Account for inventory carrying costs
Because an MOQ will impact your inventory, it's worth considering how much it costs to store each product type or its materials and whether they have a shelf life. A lower MOQ generally correlates to lower inventory carrying costs because you may be able to keep less stock on hand.
Your economic order quantity
Calculating your EOQ tells you how much to order of a single item each time. When an item's EOQ aligns with the MOQ, it can help reduce ordering and holding costs while improving overall operational efficiency.
Calculating volume discounts:
Take note of any of your suppliers' MOQs or bulk buy discounts. It can be beneficial to align a complex MOQ with these. Say you offer home-delivered avocados and get a bulk-buy discount from the orchards when you buy in lots of 50. You may choose to set a complex MOQ of 10 avocados per delivery and ask people sign up for at least 5 deliveries. This will help you avoid being stuck with leftovers that will date.
Setting your MOQ
After deciding on an MOQ for each product, plan how to roll it out to customers. You may warn existing customers well ahead of time or offer bulk-buying discounts rather than turning down orders under your MOQ entirely.
Example of a minimum order quantity
Let's say you grow fresh herbs, which you sell in mixed packs for $5. Regardless of the order size, you've got to go to the greenhouse, cut the herbs and pay for a courier, so orders of any size have a fixed cost of $30. Each pack costs you $1 to produce, so you calculate your break-even point first:
Break-even point (units) = fixed expenses / (sale price per unit - production cost per unit)
30/(5-1) =7.5.
That is, you need 7.5 packs per order to cover all your costs.
Then you decide your MOQ: With an MOQ of 9, you’ll have fixed costs of $30 and spend $9 to produce 9 packs, totalling $39 in costs. Bringing in $45 per order ($5 x9) covers those costs and leaves you with a margin of $6 per order.
Minimum order quantity FAQs
What is the difference between MOQ and EOQ?
The main difference between MOQ and EOQ is that minimum order quantity is the smallest order you’ll accept, measured in cost or quantity. so you can protect your profit margins. EOQ is a different metric and stands for economic order quantity, showing how many items or materials you should order at a time to minimise ordering and inventory costs. Your EOQ can be an essential metric in helping you determine your MOQ.
How do you establish a minimum order quantity (MOQ)?
To establish your minimum order quantity (MOQ), weigh up factors like production costs, economies of scale and the profit margin you hope to achieve. Generally, larger orders are more cost-effective but can come with downsides, like higher inventory carrying costs and more chance of stockouts.
What is an MOQ in a supply chain?
Suppliers and manufacturers set MOQs to smooth production and protect profits, playing an important role in supply chain management. It helps individual businesses maintain supplier relationships and cost efficiencies and improve inventory forecasts. This means each organisation stays profitable and is a valuable link in the supply chain.
Master your MOQ with MYOB
If you're a buyer or supplier of products, it's important to understand how MOQs could impact profits, cash flow, revenue, inventory and the supply chain as a whole. To set the right MOQ for each product, consider any bulk discounts you get, your breakeven point, order volumes, inventory, EOQ, forecasted demand and your customer's existing expectations.
The goal is to strike a balance between boosting your business's efficiency and profitability while protecting your sales and customer satisfaction. As a first step, make sure you'll have access to real-time, accurate business data like you get from MYOB's cloud accounting software. With built-in inventory management tracking and analytics, you'll have the numbers you need to find an ideal MOQ for each product. Get a free trial today.
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