MOQ stands for Minimum Order Quantity. It can be calculated in a few different ways but is often used to specify the minimum number of items that must be purchased before they’re made available for purchase or production. The benefits of MOQ are that it protects against stockouts by ensuring you have enough on hand to sell or manufacture, helping to reduce waste and material costs with smaller orders, and allowing you to purchase more at once to make savings.
For example, if you have a website that sells clothing and you want to add a new shirt design to your inventory then you would need to purchase a minimum of 100 shirts in order to sell them. This helps protect from stockouts because there will always be some on hand so no matter how fast they sell out there will still be some available for customers to buy. In general, the more items you have on hand allows for less time spent on backorders or restocks which ultimately saves money and resources.
What MOQ isn’t
There are several ways that people use the word “MOQ” incorrectly.
The first mistake is assuming that what it refers to as MOQ applies only to the minimum number of items for sale. This is not true, as this can be used to purchase anything from a single item to millions of items at once. What people usually mean when they say MOQ in conversation is actually referring to purchasing a minimum amount before being allowed for products which we will cover now.
What MOQ means when calculating for manufacturing or production
When someone says they need an MOQ of 100 units this means that if you manufacture/produce less than 100 units then the order won’t be made because it would make no sense economically speaking. A small amount of product (like 10 units) would lose money for the seller because they are carrying the overhead of purchasing materials, paying employees, etc. on items that aren’t profitable.
For example, let’s say you manufacture/produce 10 units worth $10 each but the MOQ is 100 units then your sale price would have to be more than $100 each which means that every unit would lose money on production costs alone before any other expenses come into play meaning it’d be better off not being made at all.
This helps protect against stockouts because no matter how fast they sell out there will always be some available as long as you produce/manufacture more than what’s needed.
Benefits of low MOQ:
- You reduce the chance of running out of your product
- You never go overstock and waste material and money on unsold items.
- When you have a low MOQ it’s much more affordable for you to take on large orders such as those from wholesalers or manufacturers.
- It allows you to make a large purchase of your product all at once allowing for discounts and lower prices.
Benefits of high MOQ:
- You reduce the risk of failing on new products that may not sell well.
- Having a higher MOQ means that only customers with larger budgets will be purchasing your item which can be seen as a positive or negative depending on your perspective.
- In general, high MOQ’s are only beneficial when the price is discounted due to buying in bulk meaning that they may not always benefit small businesses looking to test out their market, but if you’re able to market the product they sell in bulk can help increase profits.
- With a high MOQ, it can be financially irresponsible as small businesses may not have the resources to purchase an excessive amount of inventory as they would risk losing money on items that do not sell.
How it’s calculated
There are many different ways in which MOQ can be calculated and in most cases, it is based on the volume of the order. One way of calculating MOQ is by multiplying the total volume of your order in units by 10% to ensure that you have enough inventory on hand to cover the orders that come in.
Another way is to add up all your costs and then divide that number by your desired profit margin. How you actually calculate MOQ may not matter too much when it comes down to it, as long as you’re getting rid of all your products when they sell out.
Common mistakes made when calculating the MOQ and what to do about them
There are many mistakes made when calculating the MOQ such as
- Assuming that what you’re calculating is the minimum order quantity for sale
If you’re only looking at your costs then this may not let you realize how much money will be lost if you were to sell out of all your items because it’s based on the price you want.
- Not having enough inventory to cover all possible orders
When you have a low MOQ, people are less likely to buy more than one piece, so there’s no need to keep massive amounts of inventory on hand. This is why it’s good sense to purchase things with a low MOQ frequently rather than in bulk because they won’t move as quickly and will require less time to produce/manufacture.
- Use your desired profit margin instead of actual costs
When determining the minimum order quantity, it’s preferable to use your actual expenditures rather than what is ideal since those might differ considerably.
For example, if you expect to sell products for $120 each but they actually take $100 to produce, you’ll lose money on every sale before accounting for marketing, labor, or personnel expenses. It’s more vital than ever for small firms to advertise their items and watch out for rivals in order to stay ahead of them by always providing a competitive price and good quality. Customers will choose you rather than someone else.
- Not scanning the market for competitors
It’s critical to think about your direct and indirect rivals when determining the MOQ, since if there are a lot of other firms in your industry, you may need a higher one. You might have a low MOQ, but if your product is available in almost every local shop, it makes sense to raise it to avoid shortages. It also allows you to be more flexible with pricing so you can compete on price more effectively.
- Not Researching
If you’re not doing research on your target audience to figure out how they want and need things, you’re missing out. It’s critical for small companies to be innovative when attempting to connect with prospective consumers.
This isn’t only done via marketing; rather, it involves understanding who they are and what they want rather than assuming that everyone wants the same thing.
If you’re offering something that has a large market, do some research on your consumers to figure out why others buy from your competitors. As a result, you’ll be able to target more potential consumers, resulting in more sales.
When companies aren’t concerned with their audience or just ignore it for the sake of earning money, they won’t know who their perfect customer is, which might cause them not to reach enough people because there isn’t enough demand.
When calculating MOQ, keep in mind all associated costs involved with generating each item to ensure that if you want to stay competitive in the market, your product is worth more than what you’re selling it for. By doing so, you can assist prevent the loss of money on each sale, which is why it’s critical to use real costs for your analysis rather than what you want them to be.
A list of ways to reduce the cost of your product
- Reduce the quantity of materials
- Work with a supplier who will give you better deals for bulk orders
- Think about ways to reduce your shipping costs (this is really important as it can sometimes account for 25% or more of your total cost)
- Look into high-quality packaging which also includes things like shrink wrap and vacuum seal bags
- Make sure your product is worth what you’re selling it for so you can avoid losses on each sale
- Avoid middlemen whenever possible, as they will increase your costs significantly
- Use materials that are recyclable to reduce the environmental impact of your items
- Forget about using fancy packaging or adding in pointless extras if it doesn’t add anything beneficial to the customer’s experience and is only going to lead to more expenses/more waste
- Re-evaluate how you work with suppliers and make sure they’re offering fair prices and good quality since this might be the difference between a high MOQ and a low one (if there’s a supplier who is great but still isn’t low enough, you might want to try another or use them in conjunction with someone who is lower)
- Use an automated system so you don’t need to hire extra labor which will take time and cost money (software usually costs around $1k but will more than pay for itself later on)
- Refine your product so that it’s ready for mass production rather than just figuring out how to produce one-offs efficiently which requires skills that not everyone has access to
- Try talking with suppliers to see what they can do since if you’re selling a popular item, they might be willing to give you a better deal
- You can also look into using long-lived materials for your product which reduces the frequency with which you need to make new items
- Make sure your customers are happy so they come back for more and tell their friends about you, increasing your sales potential
- Give yourself extra time before release or during production in case anything goes wrong
- Consider using fewer colors if it helps reduce the cost of each item without affecting their attractiveness too much
- If possible, use thinner material that is just as effective but costs less
- Use high strength material even though this uses more expensive raw materials or requires more work to produce unless it’s necessary for functionality or durability purposes
Now you know what MOQ means, how it’s calculated, and the benefits of having a low or high MOQ, including mistakes.
We hope this guide has been helpful in answering any questions that you may have had about this metric!
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