MOQ stands for Minimum Order Quantity and can refer to a dollar amount total or number of units. For example, a supplier might require you to make a minimum purchase of 1000 units or spend minimum 1000 dollars for them to do a production run for you. In either case, the per unit cost is fixed and you compare their price relative to other suppliers and make your final decision.
What does MOQ mean for manufacturers?
MOQ’s are set so that suppliers can be assured of a profit when they do a production run. The cost of materials in low quantities are often high, factories get a much larger discount if they buy manufacturing materials in bulk. When a manufacturer gets a small order for a production run of moisturizer, for example, they aren’t always assured of another order from that buyer, so they can’t buy ingredients at bulk pricing. Their production cost therefore goes up, and that means they need to charge you more on a per-unit basis to make sure they can cover the cost of the production run.
Negotiating a lower MOQ
It is possible to negotiate a lower MOQ with a manufacturer. The most logical way is to ask how they can lower the price of production. There are several ways they can achieve this. Manufacturers will sometimes swap out expensive ingredients for cheaper alternatives in order to drive the price down and still keep your business. Sometimes the most expensive part of production is labor. In that case, a manufacturer might ask you for a longer lead time so that they can use less people during the production process.
Find out why the manufacturer has decided on that specific MOQ. Ask what the cost drivers for the product are. Since every product is so unique, there is no one-size-fits-all solution. In the case of skin care formulation, there are so many different varieties and combinations of ingredients, and the process is often so varied, that several factors are at play when it comes to cost.
You have to consider the individual costs of labor, materials, and machines. (For example, are they renting the machines, or do they own them?) Is there a certain process that needs to be followed to make this product? And how does that affect the cost? If you can determine the high cost drivers, then you can suggest alternatives to lower the cost, depending on how flexible you can be.
Many manufacturers also take care of the packaging and design for private labeling a product. You should remember that price is not the only thing to negotiate. There are also services and other fees that will be involved in launching your product. Time, for example, is a valuable asset. Use it in your negotiations. Some manufacturers may offer expedited production to get your product done faster. If you are going to commit to a high MOQ, get value for your investment.
The Benefits of an MOQ
Even though a fixed minimum price means a higher barrier of entry for new private label sellers, especially in the case where you just want to test the market with a small order, it does mean that the competition is also lower. And you are assured of the quality of the product from your supplier.
When you exceed the minimum order quantity, you often get into a range where the manufacturer can offer you an even lower per-unit cost, due to a higher discount on their manufacturing materials. You can also choose to use this opportunity to upgrade your product with a more expensive ingredient, boosting your brand. Forming a good relationship with your supplier is essential to take advantage of these opportunities.
Looking at a supplier’s MOQ is an excellent way to judge whether it is a company with which you want to form a long-standing relationship. It will help you determine what scale their production is on, and whether they have the capacity to meet your needs for future, larger orders. When a supplier tells you their MOQ, they will also tell you what their maximum capacity is. This will play an important role once you are selling well and need to replenish your inventory. Carefully consider lead times when you are reordering a product, so that you don’t run out of stock. You will lose a lot of money in the time you are waiting for your replenishment order, and it’s important to know that your manufacturer can handle a fast turnaround when your sales start climbing. For more tips on how to find the right manufacturer, check out our guide here.
Taking this into account, MOQs make sense. They help to ensure quality and efficiency, especially if you focus on the cost drivers. A manufacturer gives away a lot of information with an MOQ, it’s an indication of the quality of their production and labor, so choose wisely. Be suspicious of cheap manufacturers, there is usually a good reason why one of their cost drivers is so low.