Minimum Order Quantity (MOQ): Formula, Tips, & Benefits

If you’ve ever thrown an extra item in your cart to qualify for free shipping, you get the concept of a minimum order quantity, or MOQ. For businesses, some manufacturers and wholesalers require a certain unit volume or dollar amount per order—and they’ll turn away customers that are not willing or able to level up their purchases.

While it seems counterintuitive, losing that business could lead to higher profits, so it’s essential to understand how minimum order quantity works and why some sellers, particularly in low-margin or highly customized markets, have these rules in place.

What Is Minimum Order Quantity (MOQ)?

Minimum order quantity is the fewest number of units a business is willing to sell to a single customer in one transaction. While a retail store is happy to sell a single T-shirt or one head of lettuce, at the manufacturer or wholesaler level, one-offs aren’t usually profitable—these sellers may require a minimum order of dozens, hundreds, or thousands of units, depending on the product. MOQs may be based on units or value; the choice between using a quantity- versus dollar-based measure depends on various factors. In addition, many manufacturers sell in bulk to wholesalers, which then sell in bulk to retailers. Both legs in the supply chain use MOQs.

Key Takeaways

• Minimum order quantity is a critical inventory management tool that ensures each sale is profitable.
• Calculating MOQ involves analyzing production costs, profit margins, and market demand to find the right balance between order size and profitability.
• Optimizing MOQ through strategic inventory management, supplier negotiations, and data-driven decision-making can significantly improve cash flow and drive business growth.

Minimum Order Quantity (MOQ) Defined

Here’s a common definition of minimum order quantity: “A minimum order quantity is the fewest number of units required to be purchased at one time.”

To better understand how MOQs work, here’s an example. Assume a wholesaler sells widgets for $100 each. The supplier has a minimum order quantity for widgets of 100 units, or at least $10,000. The MOQ can be done on a per-unit basis or a dollar figure. Regardless, this MOQ represents at least the minimum for the supplier to turn a profit on a particular order. Factors including setup costs, administrative expenses, minimum amounts of raw materials the supplier must order, and other considerations go into this calculation.

Why Do Suppliers Use Minimum Order Quantity (MOQ)?

Suppliers implement MOQs for a number of strategic reasons that contribute to the overall health and sustainability of their businesses. Say an item is in especially high demand and is costly to ship—for example, fresh turkeys around the holidays that must stay below 40 degrees from farm to consumer. It might make sense for a supplier to require grocery chains to purchase the full contents of a refrigerated tractor trailer.

A well-crafted MOQ policy generally:

• Drives profitability: Successful businesses don’t engage in transactions that cost them money. By setting an MOQ, suppliers ensure that each order covers the fixed costs associated with production, packaging, and shipping and still yield a profit. Suppliers might also offer discounts to customers that place higher-quantity orders, above the MOQ, thereby driving additional revenue and profit.
• Reduces costs: Producing larger quantities of a product leads to a lower per-unit cost, allowing suppliers to take advantage of economies of scale. For example, a manufacturer that must set up a production run will likely have significant upfront costs and must produce, and sell, enough units to turn a profit.
• Tightens inventory control: MOQs help suppliers improve their forecasting, optimize production schedules, and minimize the risk of producing excess inventory, which increases storage costs and ties up capital.
• Ensures a sustainable business model: MOQs help suppliers maintain a stable and predictable cash flow, reduce the likelihood of stockouts or overstocking, and allow for more effective resource allocation to support long-term growth. Sales teams can be oriented to focus on orders that will be profitable for the company, rather than juggling many small clients.

How Does Minimum Order Quantity (MOQ) Impact Inventory?

Minimum order quantities have noteworthy effects on inventory for both the seller and the buyer. Sellers that choose a high minimum order quantity have to produce and possibly warehouse large quantities, and the MOQ impacts how they manage inventory in terms of carrying costs. Buyers, on the other hand, must decide if they can use or sell the MOQ of a product in a reasonable timeframe; if not, they’ll need to look for another supplier with a smaller MOQ or consider storage options. Buyers should also consider factors like whether the item is perishable or likely to go out of style, the cost of warehousing space, the capital that will be tied up in inventory, and potential savings realized by ordering in bulk.

High Minimum Order Quantity (MOQ)

When suppliers have a high minimum order quantity, they may need to hold a substantial amount of inventory—those that prefer to minimize stock on hand and use just-in-time inventory management may need longer lead times to fill orders. Larger inventory requirements also tie up a significant amount of working capital and take up warehouse space. But they lower administrative costs because products, component parts, or raw materials can be ordered less frequently and in larger quantities, which can result in bulk savings up and down the supply chain. Still, while there may be a lower risk of stockouts, there is an increased risk of products becoming obsolete, especially items such as fashion or electronics.

Low Minimum Order Quantity (MOQ)

With a low minimum order quantity, suppliers don’t need to keep as much inventory on hand, as they’ll likely see a lower average order size. That could mean less stock with higher inventory turnover and a lower risk of obsolescence. However, low MOQs can add pressure to the sales team, which may need to manage more, smaller, customers, and the company faces higher inventory administrative costs because of more frequent ordering and fulfillment

High MOQ vs. Low MOQ

Typical minimum order quantity levels vary by product and industry.

Benefits of Minimum Order Quantity (MOQ)

For suppliers and buyers, minimum order quantities can have several significant benefits. When managed well, the MOQ can be an important inventory control measure that keeps costs down for buyers and profit margins in the black for suppliers.

Benefits for Suppliers

• Improved cash flow: When product prices and order sizes are managed well, an MOQ can help suppliers realize a healthier, more predictable cash flow.
• Lowered inventory costs: In some cases, MOQs can keep inventory costs in check. Instead of producing a run large enough to make a profit and then searching for many small buyers, some orders are produced only when there is a buyer ready to purchase an amount that will be profitable for the supplier. This can reduce reliance on warehouse space and lower inventory costs.
• Better profit margins: By carefully using MOQs, suppliers can better control their margins, so goods are produced only when there are worthwhile profits behind the order.

Benefits for Buyers

• Economies of scale (bulk savings): Buyers often know they’re getting the best price per unit when working with suppliers with MOQs. Sometimes the savings from buying in bulk can mean more profit for buyers, even with increased warehouse costs or having to sell items at a discount to increase the inventory turnover.
• Improved relationships with suppliers: The relationship with a supplier of raw materials and products is of utmost importance. The relationship of the buyer’s economic order quantity (EOQ)—or the ideal quantity of inventory—and the MOQ can be a delicate balance. When the MOQ is more than the EOQ, buyers can sometimes work with suppliers to negotiate possible compromises or solutions, such as order splitting with other buyers.

Types of MOQs

MOQs are a reflection of the economic constraints for suppliers associated with processing an order. These can include materials, machinery, overhead, and fulfillment. The constraints can also be administrative, such as bookkeeping and billing.

Simple MOQs are usually defined as MOQs with one lower limit, either a dollar amount or in a quantity of units, sometimes called “eaches.” Complex MOQs have multiple limits and can include minimum parts or materials, dollar amounts, and/or finished products.

• Simple MOQ

  Many companies that aren’t retailers deal with at least a simple MOQ. This means there is a single restraint on orders. That lower-end limit could be a minimum spend or a minimum quantity ordered. For example, a book printer will likely have a minimum order required—it simply wouldn’t be profitable for most to set up their presses, order paper and ink, and do a full print run for a handful of books. They’ll know the minimum number that will make a print run profitable.

• Complex MOQ

  Instead of dealing with just one restraint, complex MOQs have two or more requirements for orders. A good example might be a clothing manufacturer. For retailers ordering products, it’s not just a simple minimum number of items. Usually there are other restraints, such as a minimum length of fabric per color and fabric type used, a ,minimum number of pieces or units, as well as a minimum dollar amount. For buyers to place an order, all these conditions must be met.

  As the name implies, setting up complex MOQs isn’t always simple, and a lot of information goes into the calculations. Suppliers need to understand the granular cost information of each component piece, as well as the labor and administrative costs that go into the order.

What Influences Minimum Order Quantity (MOQ)?

When considering MOQs for suppliers, there are two primary considerations: raw materials and order volume.

Raw Materials

Product manufacturers must deal with their own MOQs down their supply chains, just like wholesalers buying finished products. Factories that make the raw materials for suppliers rarely store inventory, for example. Instead, production on polymer plastic that will go into making bottles will only begin after receiving an order. And that order will likely have an MOQ. So, a supplier of custom-made water bottles will need to consider the minimum amount of polymer plastic, as well any other components that would go into the production run, when setting up their own MOQs for buyers of their goods.

The shelf life of items must also be considered. For example, when setting up an MOQ for foodstuffs and other perishables, how long those goods can last before spoiling should be a part of the calculation. Even for electronics, shoes, or other durable goods, sometimes shelf life is a consideration. They may not spoil, but they might become obsolete or less desirable as new products are released.

Order Volume

Order volume is at the heart of MOQs. Finding that break-even point for when an order will begin to make profit for a supplier is pivotal.

Before creating MOQs, suppliers should consider who they’re selling to currently and who they’d like to be selling to going forward. For example, if a primary customer base is small retailers, the MOQ will likely be much lower than if customers are big-box retail chains. And pricing of products will need to be adjusted accordingly—higher prices for lower MOQs to ensure they can still turn a profit. If the supplier usually sells low-margin or high-volume products, they may need a high MOQ to break even.

How to Calculate Minimum Order Quantity (MOQ)

The process of calculating minimum order quantity varies in complexity by product and industry. And it likely will not be static. As the prices of different component parts and raw materials change down the supply chain, manufacturers may need to alter prices and MOQs to stay profitable, particularly if they’re operating on low margins. Inventory management software can help suppliers stay on top of the dynamic nature of MOQs and ensure accurate calculations, and software that is part of a larger enterprise resource planning (ERP) platform can be particularly useful. ERP software brings together data from various areas of your business into one digital ecosystem to provide even more accurate and insightful information. For instance, supply chain management software is integrated with the finance management platform so suppliers can have accurate, up-to-date information about raw materials and component parts to use to calculate ideal MOQs.

There is no set formula for setting MOQs, even a simple one. But here are some basic steps to consider when getting started making MOQ calculations:

1. Consider demand: Look at historical data and demand forecasts. If suppliers are traditionally receiving orders for around 500 units, suddenly implementing an MOQ of 5,000 might not be feasible. Other considerations are things like seasonality and lead times, or how long it takes to produce and deliver an order.
2. Calculate holding costs: How much is a supplier paying to store products, also known as carrying costs? This may vary by the specific item. For example, some products need to be stored in refrigerators or may have odd shapes, making inventory management more difficult. Holding inventory for long periods of time is never ideal, and these costs need to be accounted for in MOQs.
3. Find the break-even point: If a supplier were to sell 50 units at market price, would it turn a profit? How about 500? An MOQ needs to calculate all overhead, like labor, setup charges, and other production and delivery costs to arrive at the break-even point, which is a vital part of determining MOQ.
4. Set your MOQ: After gathering all relevant data, set MOQs for each product, and create a strategy for how to implement it. If necessary, use bulk-buying discounts and other incentives to increase the average order volume (AOV), and work with customers where possible to maintain relationships. For example, say a buyer purchases 550 units from a supplier every six months, but the supplier wants to implement a 1,000-unit MOQ. That supplier could work with the buyer to deliver 1,100 units at a discounted price and ask the buyer to either pay in installments or pay a carrying fee to cover the supplier’s inventory costs, or the buyer may choose to store the items.

Three Steps to Implement a Minimum Order Quantity (MOQ)

For suppliers that are just getting started, or those that would like to implement an MOQ on some or all of their products, it’s important to be deliberate with the process. It takes more than simply announcing the change, especially if the seller arbitrarily decided on an MOQ that’s ideal for its business without considering market conditions. Here are a few tips to consider before getting started.

1. Carefully calculate the target MOQ: Start by finding the appropriate MOQ for each product; see tips above.
2. Inform existing customers: Suppliers planning to set an MOQ that will affect existing customers should communicate the change well in advance. Even if a buyer normally meets the minimum order, ensure they understand why the MOQ is being implemented. Try to find ways to continue working with buyers that don’t normally order enough to meet the MOQ, and understand that some customers may find new suppliers.
3. Enforce the MOQ: An MOQ only works if it’s enforced. Suppliers should start conversations with sales reps and account managers early so they understand how the MOQ is structured, what resources are available to assist customers, and where there is—and isn’t—room for negotiation.

6 Tips for Optimizing MOQs

Manufacturers and suppliers must continually assess and optimize their MOQ strategies from both a buying and selling perspective. Buyers—of raw materials, machinery, office supplies, and more—must manage the MOQs imposed by suppliers to make sure that they can efficiently produce their products. And sellers must set MOQs that balance profitability and customer needs. Here are six tips to make the most of these scenarios.

• Remove Slow-Moving Products

  Regularly review sales data to identify low-demand or slow-turnover items. Products fall out of favor for a variety of reasons, including changing consumer preferences, new market trends, or the availability of new technologies. Consider whether lowering MOQs, offering targeted promotions, or negotiating better terms could help push underperforming inventory out the door. If not, it may be time to stop producing or carrying these products in favor of more profitable items.

• Improve Inventory Turnover

  Inventory that hangs around too long ties up capital, increases carrying costs, heightens the risk of obsolescence or spoilage, and, ultimately, chips away at profit margins. Boosting the frequency at which inventory is sold and replaced may require adjusting the MOQ based on product demand and sales velocity as a means to increase orders.

• Evaluate Your Supplier Options

  Of little surprise, different suppliers will have different MOQ thresholds. When assessing potential options, compare their MOQs, along with overall pricing, lead times, and contract terms, to determine which one truly offers the most favorable deal. Of note, strong supplier relationships can lead to more favorable terms and the potential for negotiation.

• Use Technology to Automate

  Modern inventory management and ERP systems can automate many of the tasks involved in managing and evaluating the effectiveness of MOQs. These technologies analyze sales data, inventory levels and supplier lead times to recommend optimal MOQs for each product. Automated alerts notify businesses when inventory levels fall below predetermined thresholds, prompting them to place orders in adherence with established MOQs. By continuously monitoring demand patterns and inventory turnover rates over time, these systems can also suggest adjustments to MOQs. This helps companies adapt to changing market conditions and customer preferences, as well as minimize their carrying costs and maximize profitability.

• Incentivize Higher Spending on Orders

  Encouraging customers to place larger orders is an effective way to optimize MOQs while improving overall inventory management. By offering volume discounts, tiered pricing, free shipping, or other incentives to place orders that exceed a specific quantity or value threshold, businesses can try to motivate customers to purchase more units per order. This approach also helps companies reach their MOQs more quickly, reducing the frequency of small, less profitable orders.

• Negotiate a Lower MOQ

  Engage in transparent discussions with suppliers about business needs and sales projections. Demonstrate commitment to a long-term partnership, where both parties “win,” by negotiating a higher overall purchase volume or order frequency in exchange for reduced MOQs, for example. Other negotiation points include extended lead times and flexible payment terms.

Optimize MOQ With Inventory Management Software

Calculating an MOQ should not be done with pencil and paper. For the vast majority of companies, it’s too complex even for basic spreadsheets. Costs fluctuate, market conditions change, and details like order quantities and ancillary costs can get lost without the aid of software to manage your inventory. Supply chain management software that is part of an overall ERP platform will help you dig deep into the details of order quantities, profit margins, and other details. This information can be displayed in dashboards with easy-to-understand visuals. Being able to see up-to-date information at a glance not only helps you determine your ideal MOQs, it can be a powerful tool for other team members to understand MOQ drivers, such as profit margins and other key performance indicators from your business.

MOQs start from a basic premise: Companies must take in more money than they spend to turn a profit and stay open. The calculation can start at a fundamental level by looking at individual products to see what it costs to produce them—including hard and soft costs—and calculating how much you need to sell them for and the minimum order to make profit. This MOQ may be straightforward and be a simple dollar or unit minimum order, or it may be complex with several different component parts.

Regardless, calculating MOQs and tracking order information is aided with inventory management software. The platforms can serve up dashboards to help you understand costs, supply chain details and other information. Those dashboards can be an important educational tool for sales and management teams, so they better understand why MOQs are in place and how to work with new and existing customers to meet order minimums.

Minimum Order Quantity FAQs

How do you set a minimum order quantity?

To decide minimum order quantity, look at the gross profit margin per unit sold and compare it to your overall production costs. This should include hard costs for things like materials, as well as soft costs, such as marketing and administrative expenses. Your minimum order quantity should ensure that every sale is profitable.

What is a minimum order?

A minimum order is the smallest order size a business is willing to fulfill. That size will vary by industry and supplier.

How do you find minimum cost order quantity?

Consider overhead costs, sales volume, and profit per unit to determine the ideal MOQ.

What is MOQ in supply chain?

MOQ stands for minimum order quantity. In a supply chain, you may see various MOQs. For example, a supplier of a finished product may have a number of units required for purchase, like a minimum number of books printed. And that printer may itself face MOQs along the supply chain, such as minimum amount of paper per order requirement.