Let’s start by defining what ‘MOQ’ means.
The Minimum Order Quantity or MOQ is implemented by the seller of goods (that could be anywhere along the supply chain, but in this case we are going to focus on contract manufacturers).
An MOQ is often required to ensure the manufacturer makes a certain amount of money per order, since manufacturing below a certain order volume would not be worth their time, or they could actually lose money since they have fixed costs (i.e. tooling, training, or MOQs from their suppliers).
Now that we are all on the same page about what MOQs are, we can discuss how to deal with them since they can be a strain on your business. Let’s say you think you can sell 5,000 units in a realistic timeframe, but your manufacturer states the MOQ is 10,000 units. That is an extra 5,000 units that eat into your cash balance and could have a major impact on your business (i.e the money you spent on those extra 5,000 units could be spent growing sales).
How to work with and around MOQs:
Re-negotiate the MOQs with your manufacturer
This may sound simple, but a lot of people don’t attempt it.
1. Just ask. A lot of manufacturers will have room to maneuver, especially if you have built up trust with them. Or if they think you have potential to grow they will want to build good will. A lot of manufacturers can reduce MOQs by up to 30% if you ask.
2. Understand their reasoning. Another approach is to understand exactly why the manufacturer has chosen to implement a specific MOQ. If it is due to soft costs (like the admin cost of processing the order instead of high fixed costs, i.e from their sub suppliers), you could have the option of tying the MOQ to a $ value rather than a number of units. This would allow you to mix and match a number of variants (i.e colors or sizes) to get to the $ value MOQ rather than be stuck with a large amount of units from one variant.
3. Investigate a new manufacturer. It’s more aggressive, but don’t underestimate the option to switch suppliers or at least explore the market. By doing some research about other manufacturing options, you may have a stronger case to pitch to your current manufacturer that they are outside of market norms.
Real world example: One of our clients (Carets) managed to reduce their MOQs from 12 units per variant to 1 unit by switching suppliers for their shoes. You can read about it here.
Finance your MOQs
If you don’t want to switch manufacturers and don’t want to fund the entire order yourself, you have some options to finance it:
4. Utilize pre-orders. You can do this either directly on your site or through a platform like Kickstarter or Indiegogo where you can pre-sell a number of units that may exceed your MOQs. Even if you don’t obtain pre-orders that exceed your MOQ, it could cover a large percentage of it.
5. Leverage inventory financing. Companies like Kickpay can go a long way to help with MOQs. Even if we can’t finance the full order it may mean you have a smaller financial burden. For example, if your MOQ is 10,000 units and Kickpay thinks you can sell 5,000 in a reasonable timeframe, we can finance 5,000 units. This means you only have to finance the remaining 5,000, effectively cutting your up-front financial burden by 50%.
6. Raise equity financing: We wouldn’t necessarily recommend going down this route to cover your MOQs since most equity partners outside of “Friends and Family” won’t want their $ used to solve working capital problems. They prefer their capital being used on things that can 100x the company (R&D, team growth, etc).
New variant analysis
7. Delay the introduction of new variants. As stated previously, MOQs can put serious financial strain on a business and should be avoided at all costs, but when introducing new variants, sometimes MOQs that may be greater than demand can’t be avoided. So, when (or should) you introduce new variants?
- When you are selling significantly more than MOQs with current variants. For example, if your MOQs are 10,000 units for a hat, and your most popular variant, a black hat, is selling 13,000 units, I would not have confidence that introducing a new color would be worth the risk.
- A. It will cannibalize sales of your black hat and may drop demand <10,000 units.
- B. People generally overestimate how variants will sell (see below).
8.Don’t introduce new variants. The market generally prefers muted colors. In figure 1 you can see the sales from one of our clients that is in the apparel business. Muted colors (black, grey, dark red, dark green, dark blue, brown) sold 85% of units, while the remaining 12 more vibrant colors sold 15% combined. You have been warned!
9. Test the market. To create confidence you will hit the MOQs for new variants you can implement some easy and cheap tests to gather some data.
Put up the new variant on the website (and maybe even direct some advertising at it) and see how many people go through to the payment page. At this point you can inform them it isn’t yet live but get them to:
- Sign up to be informed when it goes live (you have a pipeline of new customers)
- Pre-order (perhaps with a discount) – see above
Are you interested in financing your MOQs? Find out more here and see if Kickpay can help cover the cost of your inventory.