If you are an online buyer, there is a high probability that you have come across MOQ, an acronym that stands for minimum order quantity. You might have tried to buy a bicycle at a terrific price from Alibaba, but unable to complete the purchase. This situation could be because of the minimum order quantity that traders on Alibaba.com have. MOQ is a tactic that sellers use to scale up profits while many potential buyers dread.
What is the Minimum Order Quantity?
Minimum order quantity (MOQ) refers to the minimum number of items that a buyer can order from a supplier. For example, if a supplier has a MOQ of 200 units, you need to be able to buy at least 200 units to deal with this supplier.
Sellers can quote their MOQ in dollars or units. MOQ is, at times, referred to as MQO, minimum quantity order. Sellers often sell commodities that have MOQs at lower prices compared to the cost of buying the same units individually.
Why Sellers Have MOQs
The main objective of having a wholesale MOQ is to boost revenue quickly by incentivizing buyers to buy in bulk. Here are the reasons why your business might need MOQs.
- Remain Profitable – if you are selling goods at low costs, you often need to sell more units to breakeven. While your prices are lower than market rates, your profit margin is smaller, and you are likely to incur overhead expenses, which eat into your already meager profits. With MOQ in place, you get rid of bargain hunters and remain with serious buyers. You can focus your efforts on more lucrative clients that purchase your goods in bulk.
- Increase Your Inventory Turnover – if your firm orders raw materials of a specific quantity from suppliers, it can be advisable to have a minimum order quantity. This limit ensures you maintain a healthy flow of materials into and out of the organization. You will not have to order raw materials and produce goods that you hold in stock for long. This inventory can make you lose revenue through spoilt goods or through discounts meant to prevent them from spoiling and losing your entire investment.
- Made-to-order Goods – if you have a business model that produces products according to the orders of customers, it can be wise to have MOQs. Using resources such as labor, electricity, and plants for a short period to produce a small number of goods is often not efficient. These limits will enable you to ensure each production cycle is productive and profitable by confirming there is sufficient demand before production.
Calculating Your Minimum Order Quantity
While there is no strict formula to determine your MOQ, there are some considerations you should take into account while computing the MOQ of a product.
1. Raw Materials Cost
You are likely to have acquired your raw materials from suppliers with their MOQ requirements. Your business needs to make profits to continue with its operations. You will need to calculate the cost of production (raw materials plus overhead expenses and other relevant costs) to know the number of goods you need to sell to break even.
2. Your Average Order Size Versus the Quantity You Want
If your business has been operational for some time, and you have data on orders by customers, you can find out your customers' average order size. Once you have this figure, you can set your MOQ to be just above it. This limit can show you whether your clients are willing to increase their order size.
You need to be careful not to set the MOQ at a highly exaggerated figure as this action can make you lose some crucial customers, mainly if few buyers accept this new business term. If many customers adopt this limit, you can increase your order volume without exerting excess pressure on valuable clients.
3. Average Profit Per Item
If you are targeting a specific amount of profit, you can add it to the total cost to know how many items you need to sell. You may also take into account additional expenses you may incur, such as costs of unsold or damaged goods. Considering this cost will allow your target profit not to be affected in the event you incur these costs.
4. Worst Case Scenario
Business owners dread worst-case scenarios, but it can be useful to plan for it. By preparing for it early, you will likely have an adequate response plan that enables you to get back on your feet. The MOQ you set should help your business get enough income to cover these situations.
Alternatives to MOQ
There are alternatives that a seller can use in place of MOQs. They include:
- Wholesale Minimum Purchase Amount – this option refers to the amount a buyer needs to buy to qualify for your wholesale prices.
- Wholesale Minimum Per Product – this term refers to the minimum quantity you set for a product instead of enforcing it for the entire order. It can be a viable option if you have specific items that you want to sell in substantial quantities to earn profits.
How to Deal With MOQ If You Are a Customer
If you are a buyer dealing with a seller who has placed MOQ requirements, you need to be creative to ensure the price you pay is sustainable. There are some approaches you can use to get a favorable deal. They include:
- Negotiating for a Lower Price – while suppliers prefer selling their goods at stated prices, sometimes asking for a discount can make them lower their rates. You have better bargaining power if you have been purchasing in bulk consistently from them, or you are ordering large quantities. If they see you as a valuable customer, they can lower their prices for you.
- Compare Prices and Terms – if you are not happy with the terms of one supplier, you can compare them to those of other sellers. Online platforms, such as Amazon Business and Alibaba, offer access to a broader supply base. Comparing these terms will ensure you pick one with those that work for you.
- Take Advantage of Trading Companies – these organizations can order for multiple buyers at once. This possibility enables you to purchase without necessarily feeling the burden of the MOQs of suppliers.
In today's business world, buyers and suppliers have various terms that facilitate trade. One of those terms is the minimum order quantity, MOQ. It refers to the units of a product or the amount a customer needs to buy from a firm.
MOQ protects suppliers by ensuring they make profits and have a healthy inventory turnover. However, setting this limit for purchasers can discourage others from buying from a seller. As a buyer, you can attempt to negotiate the MOQ of a supplier, their prices, or purchase from those with favorable terms.