Benefits of MOQ
Minimum order quantity clearly affects both — the supplier and the buyer, so let’s see if this system also benefits both sides.
As a seller, it may seem counterintuitive to decline sales because the customer is looking to purchase a slightly smaller quantity, but let’s dig a bit deeper to see what the benefits are.
Avoid selling at a loss
The main goal of setting MOQ is to avoid running into a loss. Let’s take a look at an example to understand this concept better.
Suppose a company is selling a product at $5 per item. Setting up the machinery and starting the production process costs $100. So, for the company to not run into a loss, it would need to sell at least 20 items, which would bring the total revenue to:
20 x $5 = $100
As you can see from this example, if the customer is only willing to purchase ten items ($50), then the company would be running into a loss of $50. By setting MOQ, the company is trying to avoid such situations.
Reduce carrying costs
Another benefit of setting MOQ is that it can help sellers reduce their carrying costs. Carrying costs include the costs of holding inventory, such as storage costs, insurance, and taxes.
Reduce production costs
Suppliers often set MOQs so that they can produce enough products to fill an entire order. This helps to reduce the costs associated with making small batches of products. Additionally, it helps to ensure that the products are shipped together, which can further reduce costs.
The suppliers are generally the ones setting the minimum order quantity, but that doesn’t mean buyers can’t find any benefits in this system.
The main benefit of minimum order quantity for buyers is that it allows them to take advantage of economies of scale.
Economies of scale is the idea that the more units of a product you produce, the lower the per-unit cost will be. This is because fixed costs, such as the costs of setting up machinery, are spread out over a larger number of units.
Therefore, when ordering a larger quantity of a product, the per-unit cost will be lower than if you were to order a smaller quantity, and this can greatly benefit the bottom line.