Ever thought about why you buy a dozen eggs instead of buying one egg at a time? It is because eggs are produced in large quantities and if customers will purchase one egg at a time the inventory at the stores and the manufacturing units will come to a halt. The same is the case with dropshipping businesses and inventory. To resolve inventory issues every business has issued a minimum order quantity or (MOQ).
Minimum order quantity or MOQ refers to the least number of units a business can sell to a customer at a time. Every business whether it is B2B or B2C prefers large orders as compared to small ones. Having a Minimum Order Quantity helps businesses to sell inventory more cost-effectively and profitably. MOQ makes sure that businesses earn a consistent amount of profit with every order. MOQ is used by both suppliers and retailers. For the measurement of MOQ, either monetary values or production units are used.
This blog explains very thoroughly how MOQ is impacting the e-commerce business.
How to calculate MOQ and what factors influence it?
The calculation of Minimum order quantity does not involve any specific or standard formula. Depending upon the type of business every business has its requirements for MOQ calculation. However, the following four steps can be used to determine the value of MOQ for a particular e-commerce business.
How much is the inventory in demand?
The first step in the calculation of Minimum order quantity involves forecasting the demand for the product. This step involves close communication between the supplier and the business. The reason is that the MOQ set by the supplier can help the business forecast how much of the product inventory will it need in near future.
If the supplier has a lot of orders for a particular product it means that the product is trending in the market. Businesses should also keep into account the logistics and delivery time of the product till it reaches the warehouse and then to the customer.
Also, if the product has a huge demand or is in the season then the business owners should maintain an inventory so that orders keep on running. This will save the business from running out of stock.
Calculation of the break-even point
An important part of MOQ calculation is the calculation of the break-even point. Businesses should always determine their break-even cost as no business wants to sell inventory at a higher per unit price.
For calculation of the break-even point, all other costs are considered such as cost of production, cost of delivery, labor, and setup charges.
How much is the holding cost of inventory?
Holding costs is an important element of the MOQ. Holding cost is never a favorable factor. Different types of products have different holding costs. For example, products that need refrigerators have a high holding cost. High holding cost makes inventory management difficult. Businesses should therefore make sure to keep their inventory in the supplier’s warehouse for the minimum time possible.
Calculation of the MOQ
Once all the relevant information mentioned before is gathered MOQ is calculated. MOQ is exclusive for a single3 product. After the calculation of MOQ businesses should devise strategies for the implementation of MOQ.
Business owners can also set MOQ based on the orders their partners or competitors are receiving. For example, if a partner is receiving 200 orders of a particular product then the business can set the MOQ limit to either 150 or 200.
What are some of the benefits of increasing your MOQ?
Setting a Minimum order quantity or MOQ provides a lot of benefits to e-commerce businesses. Let’s analyze a few of them:
- A major advantage of increasing MOQ is that it ensures a steady flow of maximum profits. With each order, the business sells a huge inventory.
- It helps a business to achieve economies of scale in both production and distribution of products.
- It results in process efficiency on the supplier’s side. MOQ at the supplier’s side reflects bookkeeping, manhandling, shipping, and other related costs. Keeping view of these factors the supplier’s processes, production, and workflows all are adjusted according to the size of MOQ. this results in better and improved process efficiency.
- MOQ helps a business to keep a check on the inventory available and therefore the inventory management cost remains under control.
What are some of the potential risks associated with increasing your MOQ?
Some businesses when seeing a huge demand for a particular product set a high value of Minimum order quantity. This High value of MOQ might put the business at risk. The reason is that to maintain a high MOQ level the business needs an extremely efficient supply chain management system.
To maintain a high MOQ businesses either need to order a large amount of inventory or no inventory at all. This makes the response to the product’s demand in the market less flexible. Also, in this case business needs to bear a large amount in terms of inventory cost.
How do ensure profits and product discounts while keeping in view MOQ restrictions?
It seems that businesses that don’t have the capital to meet the MOQ requirement cannot survive. But that is not the case at all. However, to survive in this competitive environment businesses can use the MOQ strategy as a source of innovation.
Many platforms and companies do not have any Minimum order quantity condition. Shipbear is a fantastic example of such companies. At Shipbear businesses can make successful dropshipping fulfillment without having to pay for any MOQ. However, the company just needs a small amount as a start-up deposit in the company’s credit system. These credits are used to start the fulfillment process right away.
Another similar example is CJ Dropshipping which also doesn’t have any MOQ requirements. The question might be coming to your mind that with no MOQ condition is dropshipping at CJ worth it? Well, there is no definite yes or no. Every platform has its limitations. For example, at CJ dropshipping businesses can only choose from products that are listed on it. the product catalog at CJ dropshipping is very limited. So, for start-up dropshipping businesses, there are better alternatives to CJ dropshipping such as Ali Express.
How to save a business from MOQ restrictions?
Especially when businesses are on the selling side there are a lot of ways through which they can save themselves from MOQ restrictions. Since retail businesses have limited buyers. In this case, businesses can offer discounts on volume orders. The less amount spent on per unit cost can be compensated by more delivery of orders to customers.
Another way to save a business from MOQ restriction is to set a high MOQ for products that have less cost. Since the inflation rate has already laid a negative impact on the purchasing power of the consumers, therefore, setting a low MOQ on expensive products can earn more profits.
Offering customers free shipping on a minimum purchase of a certain amount can also save a business from MOQ restrictions. Many customers order more volume of products to reach the minimum spend threshold so that they can qualify for free shipping. This helps a business to reach the MOQ limit.
Minimum Order quantity or MOQ is crucial to keep businesses running smoothly. MOQ has both advantages and potential risks for a business. It is better to do a careful calculation of MOQ before setting the limit. A well-planned and careful execution of business strategies such as volume discounts and setting MOQ limits as per product cost can help a business avoid losses.