One way to increase your AOV (Average Order Volume) as a wholesale distributor is to require a MOQ (Minimum Order Quantity) for certain products.
In this post, we’ll cover how you can bring in additional revenue from your current customers by bringing up your AOV through the implementation of an MOQ.
What Is Minimum Order Quantity (MOQ)?
Minimum order quantity means that customers cannot order any given amount of a product. It’s the lowest threshold quantity that you’re willing to accept on a given order. For example, if you advertise an MOQ of 500 units, customers can only order 500 units or more from you each time.
Minimum Order Quantity Formula: Calculating your MOQ
While there isn’t an exact formula for calculating your minimum order quantity per se, there is a set of guidelines to help you set it. Keep in mind that you’ll need some order history to help you set your MOQs. If you don’t have order history, reach out to your suppliers—it may make sense to model your MOQ after theirs.
Otherwise, we’ll cover a few different ways to help you determine your MOQ for your own products.
5 Ways to Implement a Minimum Order Quantity (and the benefits)
1. Look at Your AOV (Average Order Value)
Use your inventory management software to run a report that tells you what your average order value is. Set your MOQ just above your average order value in order to bring up profitability on your products. Or you can set a minimum purchase amount, such as $200, in order to cover warehousing costs. You can calculate your AOV by dividing your overall revenue by the number of orders.
2. Increase Your Minimum Order Quantity on Low-margin Products
Once again, run a report in your inventory management software to determine your lowest-margin products. By increasing your MOQ on these products, you inherently increase your profit and margins. This is yet another way to bring up your profitability on items that are popular, but low margin.
3. Take Into Account Inventory Shrinkage
By reviewing your annual inventory shrinkage (value), you can offset such costs with your MOQ. Perhaps there are product families that incur more damage than others or you sell perishable items. If so, you can apply an MOQ to those products to help offset the value of your inventory shrinkage.
5. Consider the Worst Case Scenario
A worst-case scenario is one when your customer orders the cheapest items you have in stock in order for them to reach your MOQ. Another way (than outlined above) that you can improve profits on low-margin products is to apply a minimum purchase amount, such as $500. This will bring up your AOV, your margins and improve your inventory turns.
If you’d like to learn how Systum can help you calculate your minimum order quantity and increase the amount of your wholesale orders, fill out the form below.