Minimum Order Quantity (MOQ): Benefits, Challenges, and How To Calculate

You’ve probably heard countless ways to improve your profit margins, from optimizing shipping routes to streamlining warehouse operations.

But one method flies under the radar: minimum order quantity (MOQ).

With the right MOQ, you can reduce your inventory costs, increase sales, and pass valuable savings on to your customers.

In this guide, we’ll explain the three types of MOQ, how to calculate your ideal number, and the potential challenges of this strategy. Learn how this simple concept can reshape your inventory management strategy and give you a competitive edge.

Minimum order quantity definition and meaning

3 types of minimum order quantity

Depending on your business model and the benefits you’re looking for, a product-level, order-level, or complex minimum order quantity might be right for you.

With product-level MOQs, you set a minimum number of units for each specific product. Customers have to buy at least this many units of each item in one order.

This type works best if you have high setup costs for individual products or your business only turns a profit by selling larger quantities of an item. Product-level MOQs ensure your customers buy enough to make each order worthwhile.

Rather than specifying a supplier’s minimum order quantity per product, this type of MOQ sets a minimum total quantity or value for the entire order. 

This helps each order cover your basic operating costs. It’s flexible for your customers, as they can mix and match products to meet the minimum.

For example, you could set a $500 minimum order value, allowing customers to choose any combination of products that reaches this total.

Complex MOQs combine multiple conditions that a customer must meet for an order to be valid. For example, you might set both a minimum number of units and a minimum order value, or require a certain number of units across different product types.

This advanced approach works best if you’re dealing with complicated cost structures or if simpler MOQs aren’t meeting your needs. It’s particularly useful if you’re struggling with outside costs and need more control over your orders.

While more challenging to implement, complex MOQs offer you the most flexibility in ensuring each order is profitable.

Minimum order quantity examples

Imagine you’re running a custom T-shirt printing business. To keep profitability high, you set an MOQ of 500 units. This means each order must be for at least 500 T-shirts.

Here’s why this works:

For a deeper understanding of minimum order quantity, consider how this concept looks within different business models. 

• If you run an ecommerce business that resells items from wholesalers….
  …your profit margin depends on being able to sell items for more than you initially paid. When you purchase your inventory from wholesale suppliers, you can only buy products in the specified quantities — typically larger quantities at a reduced price.  
• If your business manufactures its own products…
  …you might want to set a minimum purchase requirement for your customers to maintain profitability. Some products require a significant amount of time and financial investment to create — especially for smaller businesses. If you’re putting a lot of resources into your production processes, selling one item at a time might not be profitable. 

How to calculate minimum order quantity in 4 steps

Determining your ideal MOQ isn’t a one-size-fits-all process — it’s a strategic decision tailored to your business.

The first step in MOQ calculation is to predict the demand for your products over a certain time period. 

Demand forecasting involves many factors, including: 

These considerations are important to make as you order raw materials or purchase stock from wholesalers. 

The term “holding costs” refers to how much expense your business will incur storing and managing your inventory over time (all key for cash flow management, too).

There are many factors involved in inventory storage costs: 

As a business owner, you must find a balance between having enough products in stock to keep up with your customer demand and not so much as to cut into your profits. Holding onto too many finished products or raw materials can raise your holding costs, as you must pay for additional warehouse space. 

These challenges closely relate to minimum order quantity. If you set your MOQ too high, you’ll make your products unappealing to your buyers.

As a result, you could be left holding onto your inventory for longer than you’d planned. If your holding costs are high, this can become a serious problem. On the other hand, if your holding costs are manageable, you’ll have more flexibility in your MOQ. 

A break-even point is the sales volume at which revenue equals total costs, resulting in neither profit nor loss. For MOQ calculations, you’ll want to determine the minimum quantity that allows you to break even or achieve your desired profit margin.

Knowing how much revenue you need to cover your materials and labor investments is crucial for establishing a profitable MOQ.

To calculate your break-even point, review all of your fixed production costs, like salaries, and variable costs, like labor and materials.   

By now, you should have all the information you need to calculate your ideal number and identify your baseline for a low minimum order quantity.

Using these insights, you can determine an order quantity requirement that will balance your operating constraints with your business objectives. 

As a general rule, the more costly your product is, the fewer quantities of it must be ordered to generate a profit. For high-value items, you might consider setting a lower minimum order quantity to make your products more accessible.

Inexpensive items can cut deeply into your profit margins since you’ll have to pay for storage costs, labor, and shipping materials. In these situations, establishing a higher MOQ is highly recommended.

6 benefits of setting a minimum order quantity 

Implementing a MOQ strategy can be a game-changer for your business.

With the right MOQ, your business can save a lot of money, which you can pass on to your customers in many ways. For example, you can offer free or reduced shipping costs with larger orders. Products ordered in larger quantities often have lower per-unit shipment costs.

When customers purchase items in bulk, they can also enjoy a reduced per-unit cost. As another idea, consider offering volume-based promotions that encourage customers to buy more at a reduced price. These tactics improve your brand image and drive customer loyalty. 

MOQs promote more efficient product turnover and reduce the likelihood of holding onto too much inventory. Overstocking or understocking products can both equally harm your business. 

After calculating your MOQ, you’ll have a much clearer picture of how much inventory you need. 

MOQs also help reduce production costs by allowing you to order the correct amount of raw materials easily.

When you require customers to purchase multiple items simultaneously, you can dramatically increase your sales and save time. 

With higher MOQs, even a few sales can move many products. This is great for maintaining an efficient inventory turnover rate and preventing an excess of older or obsolete stock.

Setting a minimum order quantity will help your third-party logistics provider fulfill your orders faster. 

Selling large batches of products helps orders get picked, packed, and shipped more quickly than orders of multiple individual items. 

Fifty-eight percent of consumers buy more items than they intend to keep. Known as bracketing, this practice is costly for business owners and challenging from a logistical standpoint. 

MOQs dramatically reduce the likelihood of bracketing.

When customers choose to purchase items with a minimum order quantity, they are typically committed to that product. For this reason, implementing an MOQ can help you reach more reliable customers and reduce your return costs. 

Implementing an MOQ strategy can positively impact your profitability metrics. By requiring larger order sizes, you can recoup your customer acquisition costs more quickly.

This is particularly beneficial for businesses with high marketing expenses or lengthy sales cycles. MOQs help increase the lifetime value of each customer, improving the return on your marketing and sales investments.

4 potential MOQ challenges and optimization opportunities

While MOQs offer numerous advantages, it’s crucial to navigate potential hurdles, especially if your business requires a high MOQ.

By anticipating these challenges, you can develop strategies to overcome them and determine if an MOQ aligns with your business model.

Storing and managing large quantities of products can be challenging if you lack adequate warehouse space. To implement and optimize your MOQ process, choose a third-party logistics (3PL) provider that can scale to accommodate your new needs easily.

This means having enough storage facilities to store your products, the right equipment to move, pack, and ship inventory, and a large enough staff.

Another consideration is the size of your products. If your business sells many large or heavy items, holding higher quantities of these products can be challenging for some fulfillment partners. A reputable 3PL partner should have the inventory management capabilities your products require.

Implementing a high MOQ can limit your ability to offer a diverse product range. If too much of your capital goes toward producing large amounts of a few items, it will become difficult to innovate and adopt emerging trends. Certain industries, like consumer goods, experience short trend cycles.

This means that new products gain and lose popularity quickly. There is typically a brief surge in demand before consumers move on to other trends. If your business is within this market area, MOQs might not offer the flexibility you need to succeed.

To address this, consider implementing a mixed MOQ strategy that allows for some flexibility in product variety while still maintaining overall order value.

If you want to implement a high minimum order quantity, you’ll need to invest in large amounts of product. This can be challenging if your business does not have access to the funds needed to invest in more supplies and labor. In addition, higher inventory levels require additional storage space.

The best 3PL fulfillment partner in this situation can hold more product units and keep warehouse administrative costs within your budget.

With economic fluctuations and changing consumer trends, customer preferences are volatile. Businesses that deal with seasonal items might not want to obtain larger stock quantities than they can sell within a reasonable time frame.

If your business experiences large fluctuations in demand throughout the year, some of your stock could become obsolete if you hold onto too large of an inventory. 

Improve your business’s operations with an MOQ strategy

Implementing a MOQ strategy can be a turning point for your business.

By carefully calculating and implementing MOQs, you’re setting the stage for sustainable growth and improved customer satisfaction.

Ready to take your fulfillment strategy to the next level? At Red Stag Fulfillment, we specialize in helping businesses like yours refine operations through expert inventory planning, scalable fulfillment, and industry-leading pick-and-pack accuracy.Let’s work together to transform your MOQ strategy into a powerful competitive advantage. Reach out to our team today for more information.