Inventory management is a significant business asset in today’s competitive e-commerce world. Small business owners or people running online businesses should learn to balance it in such a way that they can meet demand and at the same time not have excess stock that they cannot sell through. This is where MOQ comes in.
What does MOQ stand for?
MOQ stands for minimum order quantity. Some wholesalers, suppliers, and manufacturers require small business owners to provide MOQ when placing an order.
What is MOQ?
Minimum order quantity refers to the least number of product units that a wholesaler or supplier is willing to sell to one business or customer at once.
MOQ meaning in business
Small business owners should make decisions and invest in opportunities that are suitable for their businesses. One of the crucial decisions is determining how much product they need to sell to their customers to be profitable.
If you run a highly customized or low-margin business, understanding how MOQ works and why wholesalers use it can benefit you financially.
What does MOQ mean in Wholesale or Manufacturing?
Wholesalers buy in bulk from manufacturers and then use MOQ to sell in bulk to retailers. A store can happily sell a single pen or spoon. However, selling single units might not be more profitable than selling hundreds of the same product. MOQ can be a dollar figure or per unit basis.
Minimum Order Quantity Example
To understand the meaning of MOQ better, here is a perfect example. Assume a wholesaler sells bowls at $10 each. He has a minimum order quantity of 100 units or $1,000. This means that the supplier can only purchase bowls of at least $1,000 at one time for the wholesaler to make a profit from that order.
How to Calculate MOQ
The right MOQ amount depends on the business and its requirements. Additionally, there is no specific or go-to formula for calculating MOQ. However, you can follow the following steps to determine the fewest units of materials that you should order for your small business or online store.
• Consider the Demand
The first thing that businesspersons should do when purchasing inventory is to forecast demand. You should consider various factors, such as product type, seasonality, and competition, to estimate the units you can sell at a particular period. This information can guide you in purchasing inventory and matching demand and supply.
• Calculate the Break-even Point
The break-even point is a vital aspect of the minimum order quantity. Consider the minimum amount you are willing to charge for a product to profit. For example, would you make a profit if you were to sell 100 units at the standard market price? How about 1,000?
The amount you set should allow you to achieve a high order value. To make a good decision, you should also think about other overhead costs like delivery costs and labor.
• Consider the Holding Costs
Small business owners should also account for the cost and time the inventory requires to reach them. This includes the time the supplier or manufacturer takes to prepare the stock for shipping, freight transit times, and warehousing. Considering all the potential delays can help determine how soon you should order the inventory.
The holding costs depend on various factors, such as the size of inventory, duration of storage, and special storage requirements. Ensuring that these items do not stay in the warehouse for long can reduce the costs. The inventory holding costs can also help you determine whether the inventory is worth investing in or not.
• Create your MOQ
After gathering all the necessary data, set the minimum order quantity for each product and define an appropriate implementation strategy. For example, you can use incentives like bulk-buying discounts to encourage your customers to order more units at once.
You can also invest more in marketing and create better relationships with your customers to motivate them to increase the average order volume.
The Significance of MOQ in Business
The benefits of MOQ include:
• Improved Cash Flow
When appropriately managed, MOQ can facilitate a smooth and predictable cash flow.
• Low Inventory Costs
MOQ can help you keep your inventory costs low by ordering products only when there is a ready buyer.
• Better Profit Margins
MOQ can increase your profit margins because you only make an order that has a worthwhile profit.
How to benefit more from MOQs
The terms of minimum order quantities may seem unpleasant when you are purchasing but awesome when you are selling. If you are running an eCommerce business, working with manufacturers with MOQ requirements in place can benefit you financially. The following strategies can also help you make the most of these requirements.
Eliminate Slow-moving SKUs
Having slow-moving SKUs will require you to spend more money on storage and fulfilling MOQs on items that are neither selling, nor generating revenue for you. To avoid stress and unnecessary expenses, keep your SKU unit count minimal.
Boost Inventory Turnover
If you have excess inventory, you have an opportunity for a high inventory turnover ratio. You should find creative methods to attract and retain customers so that you can sell your stock quicker and regain the cash that you invested.
Incentivize a Higher Spend On all Orders
You can choose to offer discounts or other incentives like free shipping to motivate your customers to buy in bulk.
Read Also: 10 Different Types of Shipping Methods for eCommerce
Summary
In summary, understanding MOQ meaning and implementing the concept is necessary when running an online business. MOQ is an effective inventory control measure. Calculating and managing it well can help you reduce inventory costs and boost your profit margins and cash flow.
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