FAQ: What Does MOQ Stand For? (Plus Formula and Benefits)
By Indeed Editorial Team
Updated August 1, 2022 | Published August 18, 2021
Updated August 1, 2022
Published August 18, 2021
When selling or purchasing products for a business, there are many factors to consider to ensure you're maximizing profitability. One factor that both suppliers and purchasers should understand is the minimum order quantity (MOQ). If you're a professional who sells products or purchases inventory for a business, understanding MOQ and the advantages of using this metric can help you maximize business profit in your role.
In this article, we answer “What does MOQ stand for?” and offer additional information about why suppliers use MOQ and how to calculate it.
What is MOQ?
MOQ stands for minimum order quantity. This represents the minimum amount of product that a manufacturer or supplier requires a customer to buy at one time. The supplier only fulfills the order when a customer has purchased the MOQ. Suppliers may set this amount by unit or by price. For example, a supplier may set an MOQ requiring customers to purchase at least 100 units of a product or spend at least $100 at one time. The MOQ amount varies widely among suppliers depending on the products they sell.
Why are MOQs important?
MOQs are important for both the buyer and the manufacturer. For buyers, an MOQ tells them how much they have to purchase before the manufacturer fulfills their order. Buyers have to purchase the MOQ but can exceed it if they want to buy more than the minimum amount. For manufacturers, MOQs help to ensure they're making money on their products and attracting customers who are willing to pay a minimum amount for their products. Manufacturers and suppliers can determine an MOQ that allows them to make a profit on all orders or reach other business goals.
Which factors determine the value of MOQs?
Here are some of the main factors that determine which MOQ a supplier may set:
Cost of production
One factor that helps suppliers determine the value of their MOQ is the cost of production. This is the total cost involved in manufacturing a product, including labor, materials and overhead expenses., which are the costs to operate a business. Suppliers consider the cost of production to determine how much product they should create to cover those costs at a minimum.
Related: What Is Cost of Production?
The other factor that suppliers consider when determining an MOQ is their product. If suppliers are selling higher-priced items, they generally set a lower MOQ because they can still make a profit by selling fewer items. In contrast, suppliers may want to have a higher MOQ for lower-priced items because they have to sell more of those items to make money.
A supplier may also create an MOQ based on the customer. This can mean that they may have unique MOQs for each purchase. For example, a supplier may set a lower MOQ if they’re selling a product to a small business than if the customer is a large retailer. The supplier can also adjust MOQs based on customer loyalty or the desire to promote new customer relationships.
Related: How To Manage Customer Relationships
What are the benefits of MOQs?
For suppliers, an MOQ has many advantages. It helps them ensure they can make money from their products by filling orders with enough product to earn a profit. An MOQ can also help them build relationships with their customers. For example, if a customer regularly purchases the MOQ, a supplier may decide to lower the MOQ for that customer to thank them for their continued business. This can help suppliers build a loyal client base with repeat customers.
While generally more helpful for the supplier, MOQs can also be beneficial for the buyer. Sometimes, buyers can negotiate with suppliers to lower the price per unit if they purchase more products. For example, suppliers may require an MOQ of 50 units at $3 each, but if a purchaser buys 100 units, they may lower the price per unit to $2.50. This can help buyers save money on their inventory costs if they require larger amounts of a product.
What are the challenges of MOQs?
For suppliers, an MOQ can sometimes make it difficult for smaller businesses to purchase their products, which can be frustrating for those buyers. Suppliers can work to establish relationships with those businesses in other ways. For example, they may offer excellent customer service and support to businesses to help customers feel that the MOQ is worth the cost.
For buyers, it can sometimes be difficult to meet the MOQ if it's too high for their budget. If buyers want to purchase products from a supplier with an MOQ, it can help to review their inventory budget. There may be ways to reallocate funds so that they can meet the MOQ and support the supplier.
What are the types of MOQs?
The two common types of MOQs are low or high. Here are the differences between the two types:
A low MOQ is any product amount under 50 units. A supplier may set their MOQ at a certain unit number if that quantity covers the costs to make the product. Lower MOQs typically indicate that a supplier may be just starting their business or getting into the industry. Sometimes, newer businesses may lower their MOQ to gain customers if they consider the profit loss to be offset by the new business.
The high MOQ threshold, unlike that of a low one, varies by industry and type of product. A high MOQ can typically be anything over 200 units, though higher MOQs usually mean that a supplier wants to sell their product in larger quantities. This may mean that they attract a smaller percentage of buyers who want to purchase those quantities, but they can still make enough profit to cover the cost of making more products.
What's the difference between MOQs and EOQs?
Another acronym that's important to buyers is the EOQ, which stands for economic order quality. While MOQ is the minimum amount required for purchase, the EOQ is the ideal amount of inventory to purchase to keep storage and ordering costs low. Knowing the EOQ can help buyers lower their inventory costs and increase their profit margin.
For buyers, the MOQ can often affect their EOQ. For example, a lower MOQ may cause buyers to purchase a smaller amount of product, which directly benefits their EOQ. In contrast, the EOQ has little impact on the MOQ that a supplier establishes. Instead, suppliers rely solely on MOQs to help them determine the amount of product to sell to make a minimum profit.
How do you calculate MOQ?
Suppliers who want to calculate an MOQ should consider the order volume, which is the amount of product they can make over a specific period, and the number of orders they can fulfill in that same time frame. Then, they can divide the order volume by the number of deliveries. The formula looks like this:
MOQ = Order volume / number of orders
Example: A food supplier that sells granola bars can produce $500 worth of product in one hour while fulfilling 50 orders in that same time frame, the MOQ is 10. Here's the formula to determine that number:
MOQ = $500 / 50 = 10
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