5 Ways Wholesale Minimum Order Quantity Can Boost Your Volume
What is this Minimum Order Quantity?
Have you always wondered why the hottest bars, clubs or restaurants levy a cover charge even before you start eating, drinking or dancing?
Why do businesses do this? Well, for a start, they need to cover their expenses in providing your entertainment, drinks and food for the night. Rent, lights, bouncers, performers and food all cost money whether they have 10, 100 or 1000 party goers.
Levying a cover charge is their way of telling you their business expectations from you from the start, for the night. So even if you walk out ten minutes after entering the establishment, the business will still extract a minimum bill from you to cover their expenses.
In the same manner, the minimum order quantity (MOQ) set by wholesalers means that they are putting their business expectations on the table. They are telling you that this is the smallest order that they will entertain so that you can enjoy wholesale pricing while they cover their running expenses, and more!
Customers that don’t or won’t meet their minimum order quantity are shown the doormat to go elsewhere. It’s cruel and capitalistic but it is a fact of business if you want to grow volume, revenue and ultimately profits.
Now, I’m going to show you five ways to get at this magic MOQ number. And then explain how they can be used to boost your sales volume.
Firstly, let’s set the MOQ. This isn’t some arbitrary figure that you pluck or a figure that your competitors are using.
Where do you start?
1. Set MOQ Below Your Average Order Size
What is Your Average Order Size?
As a busy wholesaler, you’re in complete control of your product mix and pricing. You are the boss. Your customers come to you to enjoy wholesale pricing when they buy in bulk.
If they don’t like your prices or if they can’t negotiate something favorable to them, they move on to your competitors.
Since you’re in complete control of your prices, it stands to reason that you can control the minimum volume they purchase.
The easiest and most obvious place to start is your historical average order size.
You can get your average order size by manually going through your past sales orders or have your accounting or inventory management software generate the report for you.
Do remember that this is your historical average. You need to be mindful of powerful seasonal effects such as the winter holidays if you’re dealing with holiday decorations, for example. Or the spring/summer break if you’re wholesaling water sports apparel.
Once you have arrived at an average order size for a product, your MOQ should be set just below this historical average.
An Average Order Size Example
Let’s say for example that you’re dealing with rubber water tubes. Your customers are water sports retailers across the country. Not surprisingly, your biggest retailers are in California and Florida.
Occasionally, large amusement parks buy directly from you as they need to replace the hundreds of water tubes they have in service. Plus, it’s a real pain to patch them y’know?
In a blockbuster spring/summer season, you sell well over 500 water tubes a month. In the slower autumn/winter season, it can drop to about 100 tubes as most customers opt to close their parks or reduce their operating hours, thus putting their tubes to rest.
Combing through your sales records, you arrive at a conservative estimate of an average of 300 tubes a month sold throughout the year.
So ideally you should set your MOQ to about 200-250 tubes a month. Bear in mind that customers won’t be happy to purchase more tubes than they need in the slower winter months.
However, they can schedule their orders such that they buy more tubes than they need for a month and not purchase anymore the next month or two.
In this way, your sales volume for a slow month just jumped from 100 tubes to a minimum of 200-250 tubes a month because of your MOQ.
If you’re a startup or a new business, the historical average order size won’t work for you as you have few or no sales yet. In this case, let’s move on to other ways to get your MOQ.
2. Match Minimum Order Quantity (MOQ) to Your Product
What kind of products are you wholesaling?
Someone dealing with hi-fi tube amplifiers will have a different MOQ from one dealing with plastic flowers.
Generally speaking, higher priced items have a lower MOQ; cheap items have a higher MOQ.
Why is this so?
Expensive items tend to have a larger profit margin. You don’t need to sell as many at a time to make a decent profit on these. Also, there’s usually a lead time in production or supply, so your volume will be lower. Hence, your MOQ can be lower.
On the other hand, low-cost items have a very slim profit margin. You need to make it up with a larger volume to make a decent profit on these. So your MOQ needs to be much higher.
Now, back to our examples.
A Hi-Fi Example
Your hand-made tube amplifiers sell at a wholesale price of $150 each before tax and shipping. There’s a decent profit margin on these as they are made in a country with a low-cost manufacturing base and they’re imported by the container.
So your MOQ is likely to be in units of tens rather than hundreds or thousands. You might want to set an MOQ of 10, or $1500, for ease of packing and to enjoy scale in shipping costs.
How About Another? Plastic Flowers
For plastic flowers, they sell at an average wholesale price of $2 per stalk. For that price, your customers get different blooms, leaves and stalks to suit the occasion.
Furthermore, each stalk occupies very little space as they are tall, thin and can be slightly compressed when packed and shipped. Hence, you’re able to pack about 100 stalks per box. This works out to be $200 per box.
So, depending on your customer profiles, you might want to set an MOQ of 1 to 5 boxes. This works out to be 100 to 500 stalks an order, or $200 to $1000 per order.
Mom-and-pop florists might order one box at a time while large departmental stores or household wares stores might order 5 boxes at a time.
To avoid alienating your loyal mom-and-pop customers, which number in the hundreds across the country, you might want to leave the MOQ at a conservative value of 1, or $200 per order.
At any time, regardless of whether you’re dealing with amplifiers or plastic flowers, you can increase the MOQ for an instant increase in your volume.
How Do You Implement This?
For the amplifiers, you may want to raise the MOQ to 12 or even 20 if they’re selling like hotcakes after a rave review.
For the plastic flowers, you can raise the MOQ to 2 and still not alienate your regular mom-and-pop customers. They’ll grumble for sure, but you’re telling them that if they want to enjoy wholesale pricing (and your tasteful artificial flowers) then they need to order at least 2 boxes at a time.
3. Calculate MOQ For Your Cheapest Product
What’s the cheapest product in your catalogue?
Let’s face it, your customers love a bargain and they’re always looking for ways to keep their purchase costs low.
To meet your MOQ, bargain hunting customers might fill up the rest of their order with your cheapest product.
So you need to make sure that your MOQ for your cheapest product is able to cover your costs and more.
Now, let’s say that you’re dealing in wholesale party goods like paper hats, poppers, balloons and streamers.
Your most expensive items are handmade pinatas from Mexico that contain Mexican sweets and handmade toys.
And your bestsellers are, not surprisingly, balloons and poppers that are sold in boxes of 50 at a time.
But your cheapest items happen to be colourful paper streamers that are sold in packets of 5 and 50 packets can be found in a box.
Each packet costs 50 cents, so each box costs $25 before shipping and tax.
How Do We Stop People Buying the Cheapest Stuff?
Are you going to take orders for one box at a time? Heck no! It won’t be worth your time and you won’t be able to cover your costs.
Let’s also say that you really want wholesale orders to be at least $200 in value to be worth your time and effort to process, pack and ship. Plus it does take effort to get out of that chair!
So this means customers wanting just paper party streamers need to order at least 8 boxes at a time. Or $200 an order. Ah, that’s better. And it fills up a larger shipping box nicely too!
With an MOQ of 8 boxes, you can then apply this number to other similar products such as your bestselling balloons and poppers.
So, by setting an MOQ for your cheapest product at 8, you’re also raising the sales volume on your best selling and more expensive items.
Now pass me those 8 beautiful pinatas, please!
4. Reverse Engineer MOQ From Your Average Profit
Calculate Your Average Profit
Similar to your average historical sales, you can also get your MOQ from your average profit for a product.
Remember that profits equal revenue less costs. So, time to dig out the average revenue and cost per item for a specific product.
Once you have your average profit per item, think about the target revenue that you want to see per order.
With the target revenue in hand, work out the MOQ with the average profit per item.
Let’s see how this works with an example.
Cold-Pressed Oils Example
Close your eyes and imagine that you’re a wholesaler for cold-pressed oils derived from long-forgotten ancient seeds.
These ancient seeds are typically found in South America and parts of Asia. One bottle of popular cold-pressed oil costs $19 to harvest, press and bottle. These are done by hand after all.
You then offer them for wholesale to organic and health food shops at $29 a bottle.
So your average profit per bottle is $10.
These oils are highly perishable and they must be stored in cool conditions. Also, they are bottled in dark glass bottles to avoid oxidisation.
You think that a target revenue of $200 per order would be about right. This works out to be about 7 bottles, or $70 profit.
It’s for you to decide whether $70 profit per order is enough to cover your running business costs and pay your salaries.
5. Derive MOQ From Your Raw Materials
Simple Manufacturing and Assembly
Are you dealing with products that require simple assembly before they are sold?
Your suppliers are likely to demand an MOQ themselves for raw materials or components. No supplier in their right mind would allow you to order 10 nuts and bolts at a time. They’re most likely going to ask for an MOQ of 100 or 500!
So, raw materials are sold in minimum amounts which then produce a specific number of products. The minimum amount of the raw material number is your MOQ for the product.
An example is in order.
How About a Wooden Door, Ma’am?
Let’s say that you’re dealing in custom wooden doors for homes. Exotic hardwoods cut to standard door sizes are sold and shipped in quantities of 100. Pairs of matching door handles and locksets are sold in boxes of 200 at a time. So what’s your minimum order quantity as a wholesaler?
It should be 200. Why? As you buy your handles and locksets, they will be ordered in quantities of 200, 400 or even 600 in a good month. There is no way you can enjoy ordering just 100 at a time. The factory won’t have it.
This means you need to order a corresponding quantity of 200, 400 or 600 doors to match the lockset order. So, you see, the MOQ for the handles and locksets determines your MOQ.
How about another example?
Or a Bookcase, Sir?
Let’s say that you’re a wholesaler dealing with office furniture. Your number one bestseller is a $49 flat-pack bookcase with three shelves. Offices and college dorms love them because they hold just the right amount of books and binders without toppling over.
As a wholesaler, you do some simple assembly before shipping them out to colleges and offices as no customer wants to be assembling hundreds of bookcases throughout the night.
However, each bookcase requires a custom metal cross-brace to keep them from swaying sideways. You wouldn’t want your files and paper falling to the floor with every shake, wouldn’t you?
And the metal cross-brace supplier demands a minimum order of 50 pieces because, well, they cost only $3 per brace and they can say whatever they want!
So you throw your hands in the air. Your MOQ for your bestselling bookcases should be 50, or $2,450 per order.
Using our examples, you’ve seen how setting a minimum order quantity can instantly boost your order volume. By dictating your minimum revenue per order, you are in effect setting a bar across your business for regular customers to meet. And it will be clear to new customers that they need to meet your business expectations or move along elsewhere.
I hope these 5 techniques can give your wholesale business an instant boost! And while you’re enjoying the fruits of your progress, don’t forget to have an inventory management software for small business to support you all the way.