Inventory is the most critical asset in the world of eCommerce. If you are good with inventory management, you are more likely to sell more and profitably so.
Purchasing raw products or inventory for your product manufacturing isn’t an easy task of the business.
It very well burdens the manufacturing cost, inventory cost, and overall product cost as well.
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Anything that goes wrong with your inventory orders, will impact your business dramatically.
For example, not getting enough margins on your product on raw materials along with total product manufacturing cost and customer acquisition cost can eat your profit margins.
You need a supplier that is consistent with the order as well as the quality.
Not just that the price should also allow you to buy more units. And that’s what MOQ ( Minimum busines Quantity) is for.
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If you just have started your eCommerce store or have been running for a while and still don’t know enough about MOQ, you’ve come to the right place.
Here we dig deeper on how MOQ works for manufacturers, retailers and suppliers as well.
What Is Minimum Order Quantity?
Well, it is pretty much self-explanatory! Minimum Order Quantity (MOQ) is the minimum amount that a wholesaler supplier can provide order for.
Or you being a retailer, it is the minimum amount of the order you can order from them.
For Example, if you have an MOQ of 50 units or $100, your customer will only be able to purchase if they purchase at least 50 units or spend $100 on the order.
MOQs help businesses to ensure that they are making healthy profit margins. It also keeps a stable cash flow in your business.
Should You Always Suppose To Have MOQ Terms In Place?
Certainly no! It is not mandatory to set up your MOQ terms, and completely upto the business owners, suppliers or manufacturers.
However, it just makes good business sense when you have a wholesale channel added to your business.
There are instances, more than you think where you do have to or make more sensible to drop the MOQ terms.
Suppose you are just beginning a new relationship with a retailer. You never have given stock to the retailer.
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This is the first time, and surely it makes sense to drop the MOQ requirements to make the first order more like a”test drive”.
You get a risk-free business deal to see whether it works or not, and whether it will be worth it for the long-term or not.
MOQ does help you push your on-the-fence retailers to do business with you if they are known of your MOQ terms.
Remember, at the end of the day, you’re free to decide whether and how you want to use MOQ or not at all.
When it comes to B2B ecommerce, nothing is ever one-size-fits-all. So it is better to see it for yourself and find out whether it works for you or not.
How To Deal With MOQs When You Are A Buyer?
MOQs are surely the tool used by wholesalers and suppliers to get the best buyers and stay profitable through hitting better profit margins.
But when you’re a buyer, a client or retailer, the best you can do is present yourself as an ideal for the wholesaler or supplier to get the business.
Make sure to negotiate prices for your profitability but with a higher goal set to achieve a mutually beneficial business deal.
Here are few ways or tips you as buyer can deal with MOQs :
Negotiate For A Lower Price
If you want to make the most out of the MOQs as a buyer, then start from negotiating a lower price.
It is better not to assume that the supplier won’t settle on a lower price even if you can fairly expect so.
Always, and always ask, and try your way to negotiate for a lower price. You will never know if you don’t ask.
There are some circumstances where you can pursuade a supplier to get them lowering their prices such as :
- You have developed a good relationship with the supplier
- It might be slow time of the year for the supplier
- They might have overstocked themselves.
However, in opposite circumstances that are more favourable to them, it will be difficult to get a deal out of them.
How To Calculate Minimum Order Quantity?
Step 1 : Forecasting Demand
Determinig the demand, forecasting it rightfully is the key to calculate a successful Minimum Order Quantity ( MOQ).
There are different accounts or factors upon which the estimation of your sales depends upon such as product type, competition, seasonality and more.
Demand Forecasting is about how many units you will sell.
You can use this data to put consideration for yor next purchasing order from your suppliers, and further to produce enough to meet the demands.
Don’t let your MOQ from the manufactures close to what for you are selling it out. There are other factors in the play such as :
- Total time to get the inventory ready to ship
- Warehouse receiving with third-party Logistic service Provider
- Freight tansit times
- Production times
And ther potential delays that could affect your ability to meet the demand.
Step 2 : Calculating Your Break-Even Point
Once you determine the demands, next you need to calculate your break-even point.
So what is a break-even point?
It is the minimum number of products you must have to sell in order to recover the cost and from there you can start making profits.
Anything lesser than your break-even point, you are bleeding out of finances to maintain the business.
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At best, everything comes out from the business to serve everything. You are completely hand to mouth with expenditure and sales.
Break-even point is this sweet spot where the revenue you are generating from the business is more than your costs.
It is very critical to calculate your minimum order requirement.
For Example :
You can take example of Direct-to-consumer orders where a second transaction with them, you earn profit as you have already recovered your customer quisition cost.
And since customers came back or through email marketing, there is no cost involved.
In the case of wholesale, you need to think of the lowest per-unit dollar amount that you are willing to take in exchange for a higher order value.
How low you can go with per product with increased volume, so you won’t be lower than your break-even point, and so in loss.
Step 3 : Calculating Your Holding Costs
You have done the demand forecasting predicting how many or much of you will be more likely to sell.
Then, you also got your break-even point calculated, so you know how lower you can go to facilitate the business moving further.
Now, one of the most crucial steps in order to calculate your minimum order quantity, is to calculate your holding costs.
So, first of all! What are the holding costs?
Your holding costs of inventory costs is the price amoun that costs you to store the products before shipping it to a customer.
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How much do you have to spend in order to keep a product in the inventory until it reaches the customer?
Especially, you would like to consider that over an extended period of time, the holding cost is only going to increase.
So that means, the longer the product stays in an inventory, the more holding cost you have to pay, and the more holding cost you have to pay, the lower the profit margin you get on the product.
To ensure you have your profit margins secured from inventory costs, you need to move the products as quickly as you can.
For Exmaple :
If your product requires refrigeration, then that’s another story on its own.
You have to pay for refrigeration, electricity bills and other related costs where in comparison to other products that can sit on a shelf at room temperature easily will cost you very less.
Step 4: Finally Calculate Your MOQ
Since, now you know all three of required data :
- Forecast demand of your business
- The Break-even point of your business
- The Holding Costs of your business
You can calculate the minimum order quantity you reuquire for your business.
Minimum order quality should be something that covers your break-even point and exceeds it enough.
So even if you do drop your MOQ to a certain level, you still will be making profit as you are quite far from your break-even cost.
Tips On Making Most Of Your Minimum Order Quantity (MOQ)
You Can Incentivize Higher Spend On Your Orders
Whether you are getting into retail or wholesale, and even already in, you would require MOQs for bulk buying.
It is to make sure that you get paid at least the minimum amount from the retailers.
It also allows you to go for volume purchasing since you are flexible to charging less per unit only and overall spend on your order is high.
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This further allows you to develop a long-lasting relationship with your retailers.
In the case of direct-to-consumer orders, there is a minimum amount of the items that need to be sold to ensure that your customer acquisition cost and other costs are covered.
For Example, you would only cover your customer acquisition cost and goods cost if you sell 3 bottles of your beverage priced at $12.
The same can be tried with free shipping where you allow your buyers to spend a certain amount, so that they can qualify for free shipping.
Eliminating The Bargain Hunters
Minimum Order Quantity is not about making profit margins or improving them.
It is about helping you get to those small numbers of customers who are more than happy to spend more money with you.
Remember, irrespective of whatever kind of business you’re running, it is always better to have less number of high-paying clients/customers than high number of low-paying clients/customers.
To reach more customers, it will take more time, energy and investment for a business to acquire, and that too with not desired ROI.
MOQ helps your business to eliminate all of these bargain hunters who are trying so hard to sell at the lowest possible price.
These bargain hunters, they lure you in to make more “money” by lowering you prices which is so bad for any business in the long-term.
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Rather you better focus on a lower number of clients or customers with recurring sales.
Try to acquire repeat clients that enforce recurring revenue to beat the unstable revenue for always.
Once you reach the point, this might seem gradual or not but when you do, there will be enough of your loyal audience base giving you consistent business irrespective of your customer acquisition or marketing practises.
Boosting Inventory Turnover
When you order excession inventory, it encourages you to have a higher inventory turnover ratio.
This means there will be high pressure on your business to sell your inventory faster than usual because you put the money upfront.
However, you don’t have to run only the flash sales in order to rapidly push out the inventory.
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That could also do some serious damage to your brand. Rather you should be focusing on finding creative ways to attract and retain customers.
If you can see that the minimum order quality is too high for you, then you need to recheck your business model or some other factor.
There’s clearly something else you are missing out from the equation but it is in the best interest to look somewhere else.
If not, you would be spending too much money in the business through inventory and holding costs that you will never be able to recover.
Increasing Spend Per Order
One of the best ways to incentivize your MOQs is to encourage customers to spend more by suggesting how much they can save on it.
You can promote the offers where a minimum amount has to be spent in order to get a specific discount.
What it does is make you spend for every order increase. You will be getting more average cart value or sales per order.
This also promotes that your business will always have a minimum amount of sales depending upon sales conversion.
For Example :
You can also offer a minimum shipping threshold where free shipping is only available if the customer spent to the required minimum amount.
Eliminating SKUs That Are Moving Out Slow
You have to admit the fact that brands usually have more SKUs than they should have in the first palace.
So they are pretty much stuck paying for the storage of their SKU products.
That leads them to putting out a lot of cash to ensure their MOQ is fulfilled for the products they don’t sell.
Bottom line is, to keep your SKUs as simple as possible. Make it minimal from the beginning while planning it with inventory forecasting.
It becomes quite evident how brands overestimate the use of new colors, or a bit of a different variation of the product because they just brought more SKUs for not good enough reasons.
Lot of experts suggest not to go crazy with your SKU count. Make sure your focus is more towards keeping your catalog small where the lifetime value of the brand and sales should increase.
Most of the brands that have many SKUs come to know that 50% of their total sales come from only 2 or 3 of them.
More SKUs doesn’t simply mean more sales.
Move Your Old Stock
We’ve already learned that the more items that stay in your inventory, the less profit you are likely to make.
Because you would have to pay for holding costs and other inventory charges to keep the stock.
Especially if your stock is not moving!
This is possible and happens a lot where either you tried a new product or started a new variant or just people aren’t motivated enough to buy it.
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Next you see loads of product stacking up in your inventory.
Well, the best strategy here to not bleed more money is freeing up your inventory through flash sales.
One of the best examples of how flash sales are effective is Black Friday. Even those people buy who aren’t intended to any sooner.
Even people are more likely to impulse purchase a lot of things. So you can always move your stock through flash sales.
Finding More Suppliers And Distributors
The manufacturer from whom you are getting the products, if they have higher minimum order quality (MOQ) than you prefer, try to negotiate.
Trying for a negotiation is worth practise that you can do to make this better for you.
When you can see the manufactuerer doesn’t comply anywhere around or doesn’t budge, and they are still looking for higher MOQs as per you, it’s time to find more suppliers.
You don’t have to be tied to them. Consider working with wholesale distributors, the middleman between manufacturers and others.
Find someone whose MOQ isn’t very far from what you expect, and it will be a smooth business for both of you.
Make Sure You Have Really Good Inventory Management Sytem
A really good, efficient and automated inventory management system can help you make the most out of your MOQs.
Automation is the missing key, most of the time with business failing inventory management.
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Everything is too chaotic and close to the deadline, rushing that businesses are prone to make financial mistakes.
Solution is to have a highly-efficient inventory managmeent system that automates the task that is required to be done.
So make sure your inventory management system is streamlined with automated tasks and processes.
Here are some key components or areas where you need excel with your inventory management system :
- Always maintain healthy stock levels for happy customers and quick turnaround time for fast orders.
- Keep tracking your inventory turnover ratio over time.
- Avoid having too much inventory and not having enough as well.
- Get automated notifications and reminders on your inventory.
When you are making your conversations with manufacturers or suppliers, many small businesses hesitate to go deep and discuss their priorities and concerns.
Even if it seems you know enough, there is still more to look for. And it is okay that you feel too many questions doesn’t make it a good conversation.
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Well, that’s true! The key here is to ask your questions in a more creative way in the conversations.
Think out of the box, try to rephrase your questions if you aren’t satisfied or start from the concerns you have and your past experiences.
You have to look for whether the manufacturer is fine with your primary requirements and deals to begin with.
Ask them whether they will allow you to mix and match the orders or order different products from them to hit the minimum order quantity.
Are they sticking to selling your identical units of product only?
You can also get answe of questions like whether they have leftover products from other customers as in return or cancelled orders.
Focus On Developing A Relationship
Professionalism should always be there but with it, you have to be more than just cordial with your manufacturer.
You have started on good terms, that’s great but you need to develop this relationship, and focus on a long-term aspect of it.
So it is better you and your manufacturer understand each other’s vision and help each other grow.
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There are some large parts from your side that make this relationship really good for your manufacturer.
Like always pay on time and take more and more orders from them.
If you focus on developing a long-term relationship with your manufacturer where both are mutually growing their business, it is going to be more beneficial than you think.
Also, you have to address the fact the manufacturers want you to grow and succeed.
The last thing they would want for you to go out of the business as it is no use for them, in fact, a loss.
So you better be through with your inventory and sell your products because then only they will be more invested in your business.
Make sure you sell the vision of your company to them as well, allow them to see the potential, how you want to market it and how you are different from others.
It is better if you see it more as a partnership and less a transactional relationship.