Knowing the correct Minimum Order Quantity is essential to keep your e-commerce business going. But why is it necessary, you may ask?
If you keep selling your products without a minimum order quantity or MOQ, you might lose a large chunk of your profit margin. But on the other hand, if the MOQ is too low, you might keep disappointing your customers to the point that they won't even care about purchasing from you again. Finding the sweet spot can be tricky, but here's how to do it for your business.
What is MOQ or Minimum Order Quantity?
MOQ is the smallest number of items you can purchase from a supplier/distributor. The supplier should carefully calculate it so that they don't end up selling the products at a loss. As a business owner, you might be tempted to accept every order you get, but you should wait to do that, or else you will end up with very little profit.
Here's how to calculate MOQ:
1. Start by analyzing the demand for the product
Demand forecasting is crucial for e-commerce businesses. Scale in the factors like lead time, shipping delay, transit time, and warehouse-to-warehouse time lapses.
When you scale in all these factors, you will get an idea of how much stock you must have in hand to deal with the incoming orders so that you satisfy your customers.
2. Analyze how much you spend on holding costs
Holding costs include all your costs when you house or store the products in our warehouse. No matter how low the storing cost is, your aim should be to reduce the holding time. Ideally, the product should leave the warehouse as soon as it arrives from the manufacturer. This way, you incur significantly less storing costs and earn profit without delay.
3. Calculate the break-even point
The break-even point tells you how many products you have to sell to earn back all the investments you made. That is when you are not at a loss.
It would be best to find out what number of products will help you reach the break-even point. Once it's reached, the additional sales will earn you a profit.
4. Drafting up the MOQ formulae
Now that all the necessary data is in hand, it's time to draft the formula that will get your business MOQ.
When you have this formula ready, along with a scaling strategy in place, your business will be able to avoid orders or sales that end up causing you loss without the expense of losing a customer.
Consider this example. You own a skincare e-commerce business. A customer is trying to order just a tub of cream from your store. The suggested usage of the cream is two times a day, and as per the size of the tub the customer selected, it would last them for two weeks.
If you alert the customer that if they order four tubs of the cream together, it should last them for two months, which would be long enough to see a visible improvement on their skin. They might be motivated to purchase all four of them together. You could also make the shipping cost absolutely free for them, thus motivating them to purchase more, and you aren't incurring any losses as well. This way, you managed to keep up the MOQ practical and increase the average value per order of the customer.
So what we are trying to say is if you were expecting s readymade formulae, then you might get disappointed when you read this:
There is no one-size-fits-all formula to calculate MOQ for your business.
It originates from the nature of the business and is unique to each and every business.