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Minimum Order Quantity: How to Calculate Free Shipping Minimums and Improve Bottom Line

August 20, 2021
10 min read
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Setting a Minimum Order Quantity (MOQ) can help merchants of all sizes offset the cost of providing free 2-day shipping as well as improve their bottom line and drive up the average order value. Learn how to calculate MOQ and weight profitability against customer satisfaction.

The Amazon Effect has made free 2-day shipping the norm and a requirement for today’s eCommerce businesses to keep pace with the competition.

The National Retail Federation research shows that 75% of consumers expect free shipping – even on orders less than $50 – and studies consistently show that it is by far the most effective promotional tactic available to online sellers.

In fact, in a recent Ware2Go merchant survey, almost 8 out of 10 merchants said offering 2-day shipping makes them more competitive. Plus, faster shipping is more effective in driving conversions than giving discounts. 

But how do shops offer free 2-day shipping without hurting the bottom line? 

Done the right way, free, fast shipping reduces cart abandonment rates, boosts profit margins, and drives customer lifetime value (CLV). Done the wrong way, margins plummet and every order whittles away the business. 

The solution – implement free shipping thresholds. 

Other tactics certainly exist to make free 2-day delivery more cost effective. Topping the list are streamlining fulfillment, raising product prices to include shipping fees, and creating a paid premium membership program. However, setting a free shipping threshold, or minimum order quantity (MOQ), is the easiest, least risky way for sellers to dip their toe in the water. 

Plus, even Amazon takes this approach. While the eCommerce juggernaut offers free shipping for all Prime members regardless of purchase size, non-Prime members usually only qualify for free shipping on purchases more than $25

Below are the benefits of setting MOQs for customers to qualify for complimentary delivery, along with how to calculate these free shipping thresholds.

What Is Minimum Order Quantity?

Minimum order quantity (MOQ) is the smallest number of units or dollars required to be purchased at one time. 

Accordingly, MOQ is typically seen in two areas: 

  1. Wholesale Suppliers Require MOQs from eCommerce Shops – This ensures that suppliers’ cost of production is covered and their profit margin targets are met. As a result, high-ticket items that are expensive to produce have a lower minimum order quantity than goods that are easier and cheaper to produce. 
  2. ECommerce Shops’ Free Shipping Threshold – MOQ also can refer to the minimum dollar amount shoppers must cross to qualify for free shipping. Similarly, this guarantees that merchants can offer free shipping while maintaining profit margins. 

What does MOQ mean?

MOQ is the acronym for minimum order quantity, which is the minimum amount of product a customer must order for delivery to be completed. Also referred to as minimum order size (MOS) or minimum cart value (MCV), minimum order quantity can be measured in either dollars or units depending on how gross profit margin goal is being evaluated.  

It’s easy to see then why MOQ is easily confused with standard pack quantity (SPQ), which is the minimum multiple of items that can be ordered in one package. 

Why MOQ is important for eCommerce sellers and how to make the most of it

Accurately calculating minimum order quantity and strategically taking steps to reduce MOQ is crucial for increasing CLV and maintaining margins. In short, adjusting MOQ is a tightrope that successful shops constantly walk to seal long-term success. 

Set minimum cart value too low and profit margins are destroyed. Imagine if 80% of orders qualified for free 2-day shipping, but pricing never was updated to absorb the additional fulfillment costs. Higher shipping fees would quickly consume cash flow.   

On the other hand, set the minimum spend threshold too high and potential sales are lost to cheaper competitors. If average order value (AOV) is $35 but the free shipping minimum is set at $300, customers feel ripped off paying for shipping. Consequently, cart abandonment rates would skyrocket as conversions and sales plummet. 

In short, successful shops never arbitrarily ask, “What would my customers be willing to pay to get free shipping?” They follow SKU management best practices and monitor the following metrics to calculate free shipping minimum: 

  1. Average Order Value (AOV) – Ordinarily, how much are customers spending on each transaction before factoring in shipping costs? 
  2. Average Gross Profit MarginGross profit margin is the money left over from product sales after subtracting the costs of producing the goods sold (COGS). So, the formula for gross profit margin is net sales – COGS divided by net sales. 
  3. Average Shipping Cost – Also known as median order value (MOV), what is the cost of shipping? Include all related transport costs from fulfillment to boxes and tape. 
  4. Suggested Minimum Cart Value, or MOQ – The proposed minimum dollar amount that shoppers would pay to qualify for free shipping.

Another benefit of setting a minimum order quantity is having a greater Average Order Value (AOV). A higher AOV will offset the cost of fulfillment and delivery, increasing the profit margin on each shipment. You can incentivize shoppers to meet your MOQ by offering bulk discounts (creating a greater perceived value) and offering flexible payment options.

How To Calculate Minimum Order Quantity 

Using the four metrics above, merchants can quickly determine a free shipping threshold’s profitability.

First, find the difference between Suggested Minimum Cart Value and Average Order Value, Then, this difference is multiplied by the Gross Profit Margin. Lastly, subtract the Average Shipping Cost from the result. 

Example 1: What is the profitability of a $50 minimum cart value?

Average Order Value (AOV) – $30
Average Gross Profit Margin – 45% (.45)
Average Shipping Cost – $6
Suggested Minimum Cart Value – $50

$50-$30 = $20 * .45 = $9 -$6 = $3.00

The shop would make $3 per order. But is a $50 Suggested Minimum Cart Value to maintain conversion rates?  

Example 2: What happens if Average Shipping Cost is reduced by $1? 

Average Order Value (AOV) – $30
Average Gross Profit Margin – 45% (.45)
Average Shipping Cost – $5
Suggested Minimum Cart Value – $50

$50 – $30 = $20 * .45 = $9 – $5 = $4.00

Now, by streamlining their fulfillment process, this shop is making $4 per transaction. 

Example 3: Is $4 enough to offset the cost of lowering the Suggested Minimum Cart Value to $40, with the goal of increasing cart conversion rates?   

Average Order Value (AOV) – $30
Average Gross Profit Margin – 45% (.45)
Average Shipping Cost – $5
Suggested Minimum Cart Value – $40

 $40 – $30 = $10 * .45 = $4.50 – $5 = -$.50

Unfortunately, every qualifying free shipping order now would cost 50 cents in this scenario. Even with the improvements made in the logistics process, making a $40 shipping threshold profitable would require optimizing fulfillment even further, increasing AOV, or improving average gross profit margin. 

Minimum Order Quantity FAQs

When should minimum order quantities be applied?

Merchants should consider setting minimum order quantities when they find their profit margins are too slim — whether due to advertising, fulfillment, or manufacturing costs. Rewards like free shipping after reaching a spend threshold or discounts on bulk orders can be used to incentivize shoppers to meet a MOQ.

What is MOQ in the supply chain?

MOQ (or minimum order quantity) is factored into procurement and sales. On the procurement side, merchants often have minimum order quantities they must meet with their suppliers. Merchants should compare MOQ and bulk order discounts among multiple suppliers and measure their projected sales against inventory storage costs to avoid over-ordering or over-indexing on inventory carry costs.

On the sales side, merchants can set their own MOQ to improve margins on low-cost items or products with a high contribution margin.

What is the difference between MOQ and EOQ?

MOQ (minimum order quantity) is the minimum amount a customer must spend to make a purchase. MOQ’s are used by suppliers and retailers to protect profit margins. EOQ (economic order quantity) is used to determine the ideal amount of inventory a merchant should carry to meet consumer demand without over-indexing on inventory carry costs.

How do you find the minimum order quantity?

To determine minimum order quantity merchants should consider their profit margins, average order value, and customer tolerance (measured by cart conversions).

The Bottom Line

As calculating free shipping minimums illustrates, setting minimum order quantity is an ongoing strategic process. A/B tests should be conducted continually to refine the threshold in tandem with other tactics that make 2-day shipping profitable, including reducing shipping costs, providing free shipping exclusively for high margin products, and only offering free shipping only to frequent customers.

The process for maintaining affordable 2-day shipping is complicated, which is why many eCommerce shops outsource fulfillment to a fourth-party logistics (4PL) provider to ensure expansion goes smoothly.

Ware2Go is a 4PL created by UPS to help eCommerce sellers offer affordable nationwide 1-2-day shipping.

To learn more about how Ware2Go can help you set minimum order quantity and free shipping thresholds, please reach out to one of our fulfillment experts.

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