How to Calculate Minimum Order Quantities
As a food supplier you know there are lots of things you can’t control. One of those things is order volumes. You never know exactly how many units of product your customer is going to buy, and as a result, your earnings are at their mercy. How can you take agency of this situation to have more control over your business and your profits? Start by setting a Minimum Order Value.
A Minimum Order Value (MOV) is the lowest dollar value that you will ship to your customers. Setting a MOV guarantees a minimum profit per order, while also ensuring that the cost of distributing your product is not too high per order. How is this so? Because you can calculate the perfect MOV that is specific to the needs of your own business.
To help you calculate your own MOV, we’ve created a step-by-step guide, as well as a MOV calculator for you to use.
Step 1: Calculate your cost on the road
MOVs are based on your expenses. Take into account the total cost of your driver’s wage, gas, and maintenance frees. For this example, let’s assume your delivery costs are $80/hour.
Step 2: Calculate your margins and break even point
Next, determine how much product you need to deliver every hour to break even on your deliveries. Start by calculating your gross margins — or for every $100 of sales, establish your profit after expenses. Let’s say your margins are 25%.
You can now calculate your break even point by dividing your cost on the road by your margins: $80 / 25% = $320. This means you have to deliver $320 of product per hour to break even on your deliveries.
Step 3: Set your target profit
You know what it takes to break even on your deliveries, so now let’s set some profit goals. Let’s say you want to double your break even point. This means you would have to deliver $640 of product per hour.
The revenue made from this sale would be $160 ($640 x 25% = $160). After calculating for delivery costs ($160 - $80/hour = $80), your business would net $80 in profit.
Step 4: Determine how many deliveries you can make per hour
Knowing the number of deliveries you can make every hour is necessary to calculate your MOV. You’ll need to assess the travel distance for every city, as well as each city’s urban density. In other words, how long does it take to drive to a city and how long does it take to deliver to each customer in that city?
For this example, let’s say you can make 3 deliveries every hour.
Step 5: Calculate your Minimum Order Quantity
Finally, to calculate your MOQ, divide your hourly order volume by the number of deliveries you can make per hour: $640 / 3 = $213. This means, to net $80/hour, the smallest order at which a customer could purchase your product is $213.
Let’s take this last step further. If you’re planning to be on the road for 8 hours a day, then your load capacity needs to be $5,120 of product in order to net $80/hour ($640 x 8 hours = $5,120). As a result, your business would profit $640/day. Of course, $213 is the lowest you could sell your product to reach your goal, but you may want to round the price up to build in some extra margin.
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