The best way to generate profits by requesting a minimal order amount (MOQ)
If you run or start an e-commerce business, you may have heard the term "minimum order quantity" or MOQ. If you've heard about it, you likely feel at ease.
There is advice for and against this method. This makes it difficult to decide if it is the right choice for you, especially if you don't understand how it works and how you can make money from it.
In this post, we'll walk you through what a MOQ is, how to set a MOQ that won't make your customers run to the mountains, and how to use the strategy to increase your profits and decrease your expenses.
What is the minimum order quantity?
Before we dive into the good things (how to make money with a MOQ), let's dig into the definition of the minimum order quantity.
A MOQ refers to the minimum amount that someone can order from a company.
For example, imagine you are a wholesaler on Alibaba. You create a MOQ of 100 units. This means your customers will have to buy 100 units or more to do business with you.
You can also make your MOQ a dollar amount. For example, your customers must spend at least $ 500.
Why would you want to use a MOQ? Put simply, it protects your business and your profit margins. If someone only wants to order five items from you, it is sometimes uneconomical to start the production process. If you do, you will end up losing money.
Having an existing MOQ ensures that you cover production costs and make a profit.
Do MOQs only work for manufacturers or wholesalers? No. You can also apply MOQ strategies directly to customer circumstances. For example, you can set a minimum amount to qualify for free shipping or the product.
How to calculate your MOQ
Calculating your MOQ is difficult.
This is an essential part of maintaining inventory control, but it differs significantly from company to company. There is no fixed formula for calculating your MOQ. You therefore have to adapt it to your company.
How you do that?
Follow the steps below to build your unique MOQ formula.
Step 1: calculate the demand
The demand forecast is the core of your MOQ formula.
You need to consider your various products, seasonality, competition, and other factors that will affect the number of units sold.
You can use the data to plan your next order from suppliers and your turnaround in production to ensure you can meet demand.
Other things to consider are:
- Total time it took to ship your inventory
- Freight transit times
- Production times
- other delays that could affect your ability to meet demand
Example: You sell phone cases and find that you move 10,000 units every quarter. However, their sales are seasonal. During the fourth quarter you sell 15,000 units due to Christmas demand and your sales drop to 5,000 units in the second quarter. On average, your phone cases take a week to manufacture and ship.
Step 2: calculate your break-even point
Next, you want to find your break-even point.
This is the minimum number of products that you would have to sell in order to cover your costs and make a profit.
This is the sweet spot where your sales exceed your costs.
Example: If you sold five phone cases, how much revenue would that make compared to what you spent on production, salaries, and other expenses? You determine that you need to sell 100 cases to break even.
Step 3: calculate your holding costs
Your warehousing or warehousing cost is the cost of storing your products before shipping them to a customer.
It costs you more money to hold your inventory for longer periods of time. The faster you can move items, the lower your holding costs and the higher your profit margin.
However, not all goods have the same holding costs.
Some may need cooling, which will add to your electricity bills, while other items, such as phone cases, can sit on a shelf for months at room temperature.
Example: They find that it costs $ 2,000 a month to store 500 phone cases.
Step 4: calculate your MOQ
With all of the data out of the way, it's time for your final calculation.
Let's say your phone case customers currently buy an average of 200 units.
You have to sell 100 units to make a profit.
You can set your minimum order quantity to 200 pieces. It will cover your break-even point of 100 and you can lower your MOQ to 150 if you need to make a profit and still make it.
What are the advantages of a MOQ?
As a manufacturer and seller, switching to a MOQ business model offers many advantages to increase your bottom line.
The main advantages of MOQ are:
- Cash in circulation: Afraid of investing too much money in stocks and not selling them? A minimum order amount means you have less cash for raw materials or products that don't move. You can balance your costs and profits with the item amounts accepted by your customers, reducing waste and unnecessary costs.
- Low inventory stock: You don't want your product inventory to be on a shelf collecting dust. By implementing a MOQ, you can reduce the number of finished items in your warehouse. The less time it takes to hold your products, the less money you will spend on holding costs and the higher your profit margin.
- Profit Increase: The core of MOQ is demand. You're not guessing how much product or raw material your customers want. You have a clear idea of how much stocks you can realistically move. Using your MOQ to find a balance between supply and demand can help you produce in larger quantities, lower your overall costs, and increase your bottom line.
- Move replenishment: Another benefit of the MOQ module is its ability to move inventory. If you're sitting with 100 phone cases and selling them one by one, it can take months to run out of inventory. If you set a MOQ of 50 or 100, it only takes a customer or two to clear your remaining inventory.
- Lower shipping costs: If you are constantly shipping raw materials or products to make your items, your freight costs will be high. However, if you set your MOQ to an optimal level, you will ship more products in bulk and lower your shipping costs from suppliers.
5 tips for making money with a MOQ
Okay let's get to the good stuff! We have explained the MOQ definition, the benefits and how to create a MOQ formula for your company.
Now we are going to discuss how you can make more money by requiring a MOQ from your customers.
I know it can be daunting to put one down. What if you put your customers off and no one signs up? With that thought floating around in your head, here are my top tips for implementing a MOQ and increasing (not decreasing) your profits.
1. Eliminate bargain hunters
MOQ is not just about improving your profit margin. It helps you find a small number of customers who are happy to spend more money with you.
No matter what type of business you run, it is often easier to have a small number of high-paying customers than dozens of low-paying customers. Small or one-time customers mean it will take you much longer to reach your desired income goals while consuming more time and energy.
MOQs help you weed out all the bargain hunters who want the lowest possible price and make room in your backyard for regular customers who are happy to spend larger amounts on your business.
Say goodbye to recurring income and say goodbye to an unstable flow of income.
Why should you care about generating recurring income?
2. Increase the spending on your orders
Do you want to incentivize your MOQs? Encourage your customers to spend a minimum amount by offering a discount.
- Reduce the cost per unit for higher spending: For example, sell three bottles of shampoo for $ 60 instead of $ 30 each when buying them separately.
- Offer a minimum threshold for free shipping: For example, most online retailers offer free shipping when you spend a minimum amount. It encourages customers to spend more to meet the requirement.
3. Make pricing attractive to increase inventory turnover
Your MOQ will only work if the price is right.
Your price per order must be enough to cover your expenses and generate a profit, but it still needs to attract customers. If your minimum order amount is too high, you will not receive any orders and will stay in inventory longer, which will drive up your costs.
After figuring out your MOQ formula, do your market research. See what your competitors are offering and confirm that there is enough demand before spending money on things you can't recover, such as: B. Warehousing.
4. Move old stocks with flash sales
What if your stock doesn't move? Maybe there's a break in the season, or you've tried a new variant of the product and not enough people are biting.
One of the best ways to get your money back and free up your inventory is through flash sales.
A great example of how well flash sales can work is Black Friday. Activewear giant GymShark often uses this strategy on the biggest sales day of the year and has broken internal sales records by generating $ 400,000 in 60 minutes.
A well-executed sale can do more than move excess inventory or help you break even on poorly selling items. When done right, it can also increase customer loyalty and acquisition, which will increase your profits in the long run.
5. Have a good inventory management system in place
Automation is an essential part of any business. It helps you do more with the same number of hours a day and focus on the actions that move the needle forward.
When using a MOQ strategy, your success depends on a good inventory management system. With just a few clicks of the mouse, you can set reorder points for specific items and thus optimize your inventory management process.
Further advantages are:
- Keep your customers happy by maintaining healthy inventory and fast order fulfillment.
- Track your inventory turnover rate to make better use of your resources.
- Save money by avoiding too much money tied up in inventory and not having enough inventory to complete customer orders.
How to calculate your MOQ
- Calculate demand
Predict the number of sales you will make. When calculating this number, consider the products you sell, seasonality, competition, delivery time, and other factors that can affect your sales numbers.
- Calculate your break-even point
Determine the number of products you need to sell to make a profit.
- Calculate your holding costs
Find out how much it costs to store your products before sending them to customers.
- Calculate your MOQ
Find out how many units you need to sell to make a profit, how many are likely to sell, and determine your MOQ accordingly.
What's one of the most disgusting things about starting a business? Capital.
Not all of us have access to a lump sum to invest in an idea, and the thought of going into debt for a company that is not getting results is terrifying.
With a minimum order quality strategy, you can reduce upfront capital, unit cost, and expenses such as inventory costs. The MOQ that works for your business is unique. To find it, you need to research, plan, and understand the market demand.
Once you have it, a MOQ can help you scale up, avoid unnecessary costs, and run a profitable business.
Capital isn't the only thing you need to start a successful business. All you need is a great digital marketing strategy. If you need any help in this area, contact our agency!
Do you think the minimum order quantity is a good business strategy? Why or why not?
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