Minimum Order Quantity (MOQ) In Ecommerce Explained

Minimum Order Quantity (MOQ) says a lot about the viability of suppliers for your ecommerce business. It’s among the first things that must be considered when comparing potential partners. Forming partnerships with suppliers that have sensible MOQs can result in optimized inventory, cost-savings, better supplier relationships, and increased customer satisfaction. Not taking MOQ into account, on the other hand, might mean contractually agreeing to buy more than you’re able to afford, store, or manage. 

From holding costs to economies of scale, there are plenty of things to know about MOQ before making a commitment. This article will explore the concept in depth, discussing what it means and how to ensure it helps rather than hinders your ecommerce venture’s operational health. 

What Is Minimum Order Quantity (MOQ)?

Minimum Order Quantity (MOQ) refers to the smallest number of units a supplier is willing to sell in a single order. This concept is primarily used in business-to-business (B2B) and wholesale contracts, which lay out minimum thresholds in terms of cost or unit quantity. For example, a supplier might require buyers to purchase at least 400 units or spend a minimum of $400 per order. 

The supplier determines order minimums based on their business model, production capacity, and target market. Some set low MOQs to attract a diverse customer base, while others opt for higher thresholds to focus on larger clients. 

Ecommerce businesses can also choose to set MOQs in certain direct-to-consumer (DTC) contexts, especially for custom or made-to-order products. Less frequently, an ecommerce business might set MOQs for specific DTC products on channels like Amazon. This can be a strategic move to ensure profitability on platforms where fees and logistics costs could otherwise erode margins on smaller orders. Setting MOQs in this context helps to cover shipping costs, reduce transaction fees, and streamline fulfillment processes.

The Difference Between MOQ and Economic Order Quantity (EOQ)

Although they have two words in common, minimum order quantity (MOQ) and economic order quantity (EOQ) aren’t the same. MOQ is a threshold — the minimum number of units suppliers require customers to purchase. Suppliers set MOQs to ensure their own efficient and profitable production costs.

By contrast, EOQ represents the ideal number of units an ecommerce business should procure to minimize total inventory costs, which include ordering, holding, and shortage costs. EOQ aims to optimize ordering frequency and order size, balancing these costs to avoid stockouts and excessive inventory.

Ecommerce businesses can use EOQ to gauge whether a supplier’s MOQ makes sense for their unique circumstances. Order minimums should never be substantially higher than what’s economically feasible for your business. Working with a supplier that has a MOQ of 500 when your EOQ is 100, for instance, would lead to hundreds more units of inventory than needed and increase holding costs. A business with an EOQ of 700, on the other hand, would be able to meet that supplier’s MOQ without worrying about overstocking. 

How Minimum Order Quantity Affects Ecommerce

Minimum Order Quantity shouldn’t just be perceived as the threshold ecommerce businesses need to meet if they want to work with a specific supplier. Representing a commitment to inventory level size and spending, MOQs have significant implications for operational health at large. 

MOQ Often Affects Unit Cost

Higher MOQs can lead to lower unit costs due to economies of scale. When businesses order larger quantities from suppliers, the fixed costs of production and distribution are spread across more units, reducing the average cost per unit. Suppliers typically pass on these savings to business customers in the form of volume discounts. This means that businesses meeting higher MOQs can purchase products at a lower cost per unit, improving their profit margins.

MOQ Impacts Financial Liquidity

Purchasing larger quantities of products upfront means tying more money up in inventory. It also requires storage space, which not every ecommerce business has enough of in its warehouses or fulfillment centers. Meanwhile, a low supplier-set MOQ allows smaller businesses to acquire and sell products without extending themselves as far. 

MOQ Determines the Practicality of Supplier Relationships

Supplier minimum order quantity has significant implications for supply chain managers, particularly those of smaller ecommerce companies with less capital and capacity to work with. This is because there comes a point smaller businesses where a supplier’s MOQ becomes unrealistic for the logistical or financial circumstances at hand. 

For instance, a supplier of all-natural health supplements with an MOQ of 2,500 units would be an impractical choice for newer ecommerce businesses that only have a few hundred repeat customers. The perishable nature of this specific product makes it likely for inventory to spoil before being sold. A supplier with a low MOQ in place, on the other hand, could cater to small-scale sellers, albeit probably at a higher cost per unit. In this scenario, the ecommerce business should choose a supplier with an MOQ they can reasonably meet to avoid excess inventory that might expire.

Is a High MOQ or Low MOQ Better? 

MOQs can have various impacts depending on both the size of the order minimum and the capacity of the supplier imposing it. 

The Case for a High MOQ

Minimum order quantity rules are typically selected based on several factors. Among the most compelling is cost. Ecommerce businesses that work with high-MOQ suppliers pay more upfront for inventory but receive better per-unit pricing. Those with the capacity for additional stock can use this reduced production cost to collect more profit or lower customer product prices and bolster market competitiveness.

Advantages

Cost Savings: High minimum order quantities often come with bulk discounts, reducing the per-unit cost and increasing profit margins for ecommerce businesses.

Inventory Security: Maintaining a large safety stock can prevent stockouts and enhance supply chain resilience, which is a sustaining characteristic during supplier shutdowns or material shortages.

Market Competitiveness: Lower costs can sometimes be passed on to customers through lower prices, although this strategy must be balanced with maintaining sufficient capital for other competitive needs.

Considerations

Storage Requirements: Ecommerce businesses need ample space to store large orders of inventory. Using a third-party logistics (3PL) service provider can offer flexible warehousing solutions to accommodate fluctuating inventory levels.

Upfront Investment: Significant initial capital is needed to meet a high minimum order quantity, which can strain cash flow for smaller businesses.

The Case for a Low/No MOQ

Low MOQs make sense for their own set of scenarios. For instance, ecommerce businesses with a limited budget benefit from the reduced financial barrier to entry. Less capital committed to inventory orders also means being in a better position to pursue new product offerings. Seasonal items or trend-driven products, in particular, can be introduced and tested with less financial risk with a low MOQ. 

This flexibility proves valuable in markets that have short product life cycles, as well as those that are easily influenced by new trends. For example, a fashion ecommerce business might prefer low MOQs to quickly adapt to changing trends and avoid the risk of holding outdated inventory. 

Advantages

Financial Flexibility: Low MOQs reduce the initial investment required for a purchase order, freeing up capital for other business needs.

Product Testing: Businesses can introduce and test new products with minimal risk, adapting quickly to market trends and seasonal demands.

Inventory Management: Easier to manage inventory levels, reducing the risk of overstocking and associated storage costs.

Considerations

Higher Unit Costs: A low minimum order quantity often comes with higher per-unit costs, which can reduce the profit margin on individual products.

Limited Supplier Options: Some suppliers may not offer low MOQs, limiting the range of available products.

Determining a Minimum Order Quantity That Works for Your Business

Consider the tradeoffs between order values, storage capacity, unit price, purchase accessibility, customer demand, inventory turnover, and liquidity that we went over in the last section. Although no two scenarios are the same, it’s safe to broadly state that ecommerce businesses with more storage space and capital to spare can afford to assume the potential drawbacks of high supplier order minimums. Less-established e-commerce sellers are likely to fare better when working with suppliers that have low MOQs.

Using Demand and Costs to Find a Reasonable MOQ

No standard formula exists for minimum order quantity, so businesses must estimate based on their unique overhead costs and break-even points. The steps outlined below provide a walkthrough of this process. 

1. Determine Demand

Cost and practicality are the two main determinants behind an MOQ’s viability. Striking a balance between them starts with obtaining a clear idea of ongoing demand. 

While order volume fluctuates depending on the time of year and product in question, virtually every SKU can be forecast to some degree. Turn to historical sales data and market trends to identify patterns in monthly customer demand and apply them to future projections. Ideally, a supplier’s MOQ requirement will be less than or equal to the monthly average order demand. 

For example, it makes sense to work with a supplier that has a simple MOQ of 1,000 units when your store sells a larger quantity of 1,200 units every month. Even with potential seasonal changes in demand of up to 20%, that buffer of 200 units would provide room to adjust. 

Just be sure to keep the shelf life and inventory turnover rate of individual products top of mind. For perishable goods, it’s worth negotiating lower MOQs or seeking suppliers that specialize in smaller, more frequent deliveries to minimize the risk of excess inventory spoiling.

2. Define Holding Costs

Even smaller differences between supplier MOQs and monthly sales can add up to significant costs if items require lots of space to store. Stocking an extra 100 air conditioning units, for instance, would incur much higher holding costs than stocking an extra 100 bracelets. Utilize forecasting tools and consult with sales staff to consider every SKU in your inventory on a case-specific basis. 

Holding costs can vary by facility but fundamentally include warehouse rent, utilities, insurance, security, and handling equipment. If a 3PL service provider keeps your inventory in its fulfillment centers, most of these expenses should already be baked into storage fees. 

3. Calculate the Break-Even Point

The break-even point represents the quantity at which your revenue (sales income) equals your total costs (fixed and variable expenses). A supplier MOQ should be at or above this point to ensure profitability.

To calculate each product’s break-even point, first determine fixed costs (e.g., rent, salaries) and variable costs per unit (e.g., materials, direct labor). Then, subtract the variable cost per unit from its selling price to get the contribution margin per unit. Dividing the total fixed costs by this contribution margin will quantify the break-even point in units. 

For example, suppose your fixed costs are $5,000 per month, and your variable cost per unit is $10. If you sell each unit for $25, your contribution margin is $15 per unit. Dividing $5,000 by $15 gives you a break-even point of approximately 334 units. 

However, it’s important to remember that this number is subject to change. Historically assessing break-even points against factors like demand and cash flow will provide a better picture of whether a supplier’s MOQ makes sense for your specific situation.

Shipfusion's Real-Time Reporting for Minimum Order Quantity

Focusing on minimum order quantity in the supplier relationships you make today will help your business avoid excess costs and frustrations in the future. The fundamentals we’ve explained in this article should provide some helpful context when planning. 

Of course, inventory management is only as effective as it is well-informed. Shipfusion’s real-time reporting gives ecommerce business owners the insight they need to make confident decisions about MOQ, EOQ, and so much more. 

Take advantage of a detailed dashboard complete with real-time information on supply chain KPIs like inventory levels and order status. With historical data, future forecasts, and our dedicated Account Managers by your side, you’ll have all the input you need to optimize your fulfillment processes for both cost and space savings on an ongoing basis. Request a quote to get started today.