What is a MOQ and How Can You Make It Work for You
As you begin to scale your business and expand as an entrepreneur, you might realize you could benefit from having more control over the manufacturer costs associated with your products. Maybe you’ve expanded to the point where you are ordering a higher number of items from your supplier, or you are ready to scale your supply to meet higher demand. You may want more transparency with manufacturers around the costs of your stock and manage this cost at a higher scale. This is where a Minimum Order Quantity (MOQ) from a manufacturer comes in handy.
Feel like your business could use a MOQ, but not sure how or where to begin? We’ve created a comprehensive guide to getting a MOQ and how it can work for you as an entrepreneur so you can jump right into the process.
What is a MOQ?
A MOQ, Minimum Order Quantity, is the least amount of product a manufacturer is willing to produce for you per production run. When you order from a manufacturer at a high volume, you must be able to meet their MOQ. For example, a manufacturer may have an MOQ of 1,000 units, which means that you must be able to purchase 1,000 units to work with that manufacturer. Some manufacturers quote their MOQ in units and some quote in dollars.
Manufacturers need to make a profit margin on every item they produce and will set the MOQ based on their financial needs. It doesn’t make sense for a manufacturer to produce a custom product for you unless you can exceed a specific volume threshold. They have to cover the cost of running their business, from employees to materials to machinery and will factor in these costs to determine their MOQ.
However, as a seller, you can negotiate with a manufacturer to get a MOQ that is fair for your business, especially if you have an existing working relationship with a manufacturer, and it is clear to you both that your business is expanding at a profitable rate. Most manufacturers are open to negotiating an MOQ with entrepreneurs if they believe it will be profitable for them and will result in a long term business relationship with high returns.
What are the advantages of a MOQ as an entrepreneur?
As a small business owner, a key advantage of using a supplier with a MOQ is that you can get the best price possible per unit when you purchase in bulk. The more you buy from a supplier, the better value you will get as a business owner. This is ideal if your business sells large quantities of merchandise, as you will be getting high value on your supply and selling your supply at a higher profit margin, a win on both fronts.
A MOQ is a clear advantage if you are a small business owner with a large amount of stock that sells on a regular basis, and you can afford to pay the MOQ for these goods upfront. A MOQ is also a great way to foster a sustainable relationship with a supplier, and ensure your supply is always consistent and available as you need it.
What are the disadvantages of a MOQ as an entrepreneur?
For entrepreneurs with a smaller setup and a lower stock requirement, a high MOQ won’t be beneficial for business. Often, if you are a growing business with limited stock, you just won’t be able to afford the MOQ set by a supplier. For example, if your shop only moves 100 units a month, a MOQ of 1,000 units a month set by a supplier will not be financially viable for you. So, a MOQ at a high rate can be a disadvantage to a small business that doesn’t move a high amount of volume on a regular basis, such as an online boutique or a curated brick and mortar store.
Another disadvantage is that you are required to pay for stock upfront based on the supplier’s MOQ, and you may end up with more stock that you can sell or be stuck with deadstock that you will lose money on. For example, if the supplier’s MOQ is 1000 units at $10 each, you have to pay $10,000 upfront for the stock, which may not be feasible for a small business. This setup also puts added pressure on you to sell the stock quickly to stay afloat.
However, not all suppliers have an MOQ that requires high volume to qualify. There are suppliers with lower MOQs that will appeal more to a fledgling small business with a lower volume of stock. You just may have to do more research to find these suppliers and negotiate a fair MOQ with them to serve your business needs.
Keep in mind that a supplier’s MOQ usually does not include additional fees like the cost of shipping. If you’re ordering stock internationally, you will also need to factor in the cost of completing the necessary paperwork to get your stock through customs.
How do you get a fair MOQ?
Getting a fair MOQ is a combination of doing your industry research and analyzing your business needs. You also need to be prepared to negotiate a fair MOQ once you’ve found the right supplier for your needs.
Know your options when it comes to supplier type
Start by identifying the supplier type that is the best fit for your business. There are two different types of suppliers:
This type of supplier manufactures your products. Working directly with a factory means that your prices will be lower if you are ordering products in bulk, as there is no middleman or additional markups. It’s also easier to have custom products made and make adjustments to products during the manufacturing process.
However, factories tend to have a higher MOQ due to their high production costs. You may also find it challenging to navigate the complex maze of relationships required to connect directly with a factory, especially if you are considering a factory in China, as they tend to communicate only through a representative or agent.
A trading company
This type of supplier acts as a middleman between you and a factory. A trading company works with multiple factories to communicate your needs as an entrepreneur and ensure you get the products you need. They have close relationships with trusted manufacturers and will take care of most of the details for you to make product creation easier.
Trading companies tend to have lower MOQs and a varied product selection for you to choose from. By working with many factories across different industries, they can also make it easier for you to access a variety of different products.
However, trading companies charge additional fees on top of the MOQ to cover their service, which can get expensive. As an entrepreneur, you will also have less control over the final product because you are working through a trading company.
Many small businesses end up choosing a supplier type on a case by case basis, working with a factory or a trading company based on the volume they need for their business. Often, your order size will dictate whether you work with a factory or with a trading company. Doing your research when it comes to supplier type, and identifying your supplier needs will help point you in the right direction and make it easier for you to negotiate a fair MOQ.
Identify Your MOQ Needs
Your supplier is responsible for creating your products and is an essential aspect of your business. The quality of your supplier may be reflected in their MOQ, though just because a supplier has a lower MOQ doesn’t mean you should choose them right away. Before you go for the supplier with the cheapest MOQ or splurge on a supplier with a high MOQ, consider what your needs are as a business. Ask yourself a few key questions when shopping for a MOQ:
Does the supplier meet the product safety requirements for my niche market?
You do not want to be responsible for selling products to your clients that are dangerous, unsafe, or could cause harm. Review the safety requirements for your industry and confirm the supplier meets or exceeds them.
Does the supplier produce items of good quality, to the standards preferred by my target audience?
When a supplier has a very low MOQ, they are more likely to make products of lesser quality, as they need to meet the lower MOQ by using cheaper materials and less labour. Confirm the supplier makes products that meet your business standards as well as the expectations of your customers.
Does the supplier have a solid history of fulfilling orders on time?
The last thing you want as an entrepreneur is to have a high demand for your product and delays in fulfilling that demand due to your supplier. Check that the supplier has a good track record when it comes to fulfilling orders on time and in full so you can be confident you won’t have any delays or issues.
Does the supplier have a strong customer service team that is responsive and supportive?
Having a good customer service team shows that the supplier cares about maintaining a transparent business relationship and will prioritize your needs as a seller. It will also make it easier for you to work out any issues that might come up so that there are no delays.
Request MOQs from a few different suppliers
Check online for a list of suppliers and their MOQ, searching by your industry. Sites like A Better Lemonade Stand offer MOQ supplier directories for a small fee. You can also reach out to other small business owners in your area and your industry to find out which suppliers they use, as they may be able to refer you to a good supplier with a reasonable MOQ. Create a list of several different suppliers so you can get a range of different MOQs to compare and contrast.
Once you have a list of suppliers, contact them to find out their MOQs. Email their point of contact and request the pricing and availability of specific items. Ask for pricing for a variety of units based on your business needs, such as 500 units, 1,000 units, and 5,000 units, to get a sense of the volume the supplier can produce. You should also request product catalogues, lead times for manufacturing, and their MOQ.
Some suppliers will respond with high MOQs that are out of your price range as a business, and you can set these aside. Some suppliers might respond with very low MOQs that might not fulfill your supplier needs when it comes to quality and customer service. Look for suppliers that respond with an MOQ that is within your price range, as these are the suppliers you can then negotiate with and agree on a reasonable MOQ for your business.
How do you negotiate a MOQ with a supplier?
Once you’ve identified a supplier with an MOQ that fits your business needs and is within your price range, get in touch with them and ask if their price is negotiable. Most suppliers will be open to negotiation if they think you are in the ballpark of their MOQ and could become a long term customer. The supplier will consider if your business is viable and if they respect your business, so go into the negotiation with confidence and professionalism. Do your due diligence before you meet with the supplier to show you understand their role and their track record in the industry.
There are several different negotiation tactics you can try:
Offer to pay for a percentage of units upfront
Suppliers will often be open to an agreement where you pay for a percentage, usually 30-70 per cent, of the units upfront for a lower MOQ, as this helps them move stock out of their factory right away. It also helps to build a long term relationship with you as a customer, which some suppliers might see as more valuable than a quick buck. Try to negotiate for a lower MOQ if you purchase units right away, especially if you plan to turn around and sell those units quickly to your customers.
Offer a higher MOQ for less products
Another option is to negotiate where you pay a higher MOQ for less products. Suppliers may be open to this option if it makes sense financially for them to give you less products for a slightly higher price point, and still make a profit on their end. For example, if the supplier’s MOQ is $1 for 500 units, you may offer $1.25 for 300 units. Of course, only offer a higher MOQ for less units if it is financially viable for your business, as you do not want to end up negotiating yourself into a deal you can’t afford.
Offer to increase the volume of your order
If you are trying to buy different colours or varieties of the same product, consider increasing the volume of a specific colour or variety to offset the cost to the supplier. Most suppliers will be open to negotiating the volume of your order, especially if it will result in no added cost to them or a reduction in their profit margin.
For example, maybe your shop orders t-shirts in white, black, and a custom dyed colour. Most suppliers will offer a different MOQ for each variation, with the custom variation often being the higher MOQ. Maybe you notice the custom dyed t-shirt isn’t selling as well, and offer the supplier a reduction of the volume of the custom t-shirts and an increase in volume of the white or black t-shirts to offset the difference in cost.
Offer payment in installments
If you aren’t able to pay the supplier’s MOQ in one transaction, ask them if they’d be open to shipping your order in installments and accepting payment once you receive each installment. You may be able to work out a system where they pay for a percentage of the MOQ upfront and then pay the rest in installments, as your shipments arrive. Some suppliers may be open to this negotiation if they believe your business is viable, and you will be a long term customer for them.
Make a MOQ work for your business
Navigating the ins and outs of a MOQ can be overwhelming as an entrepreneur. Hopefully, this guide has provided some clarity around the role of a MOQ and how you can make a MOQ work for your business needs, as well as how to negotiate an agreement with a supplier that works for you.
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