Your beauty brand has an amazing new beauty solution. Now that you’re ready to bring it to life, there’s a new challenge; meeting your contract manufacturer’s minimum order quantity (MOQ). Here’s what this means, why it’s important, and how to determine the practical number for your brand.
An MOQ is the fewest number of units a manufacturer is willing and able to sell to a customer at once. Like most manufacturing processes, it’s a crucial aspect of beauty manufacturing.
After your beauty brand and manufacturer of choice work together to create a product concept, you must then come to an agreement regarding the feasibility of an MOQ for both parties.
Why Do MOQs Matter in Beauty Manufacturing?
Beauty brands should always be aware of MOQs for each of their products before signing a contract.
Some suppliers have very high MOQs, which can be difficult for new and experienced brands alike to sustain. Buying from a supplier with a high MOQ doesn’t just mean a high influx of products. With that, there will also be a need for adequate storage space and increased packaging supplies. In short, a high MOQ for a product raises the cost of everything related to that product.
Discussing MOQs with your supplier is a key step in the beauty product creation process. You need to make sure that your orders:
- Are profitable
- Are cost-effective
- Include a consistent gross margin
- Cover your pipeline from initial launch to re-orders
So, if you dive in without properly assessing the MOQ for your new product and its impact on the rest of your supply chain, this could lead to wasted time and money – and a plethora of financial problems down the road.
Every beauty manufacturer has their own capabilities and MOQ range, and every beauty brand has its own practical MOQ that it can meet. Here’s how to determine the right MOQ for your brand, ultimately helping you decide which contract manufacturer you should work with.
How to Determine Your Attainable MOQ: 4 steps
#1 — Measure Your Demand
To be cost-effective, your inventory on hand needs to align with your projected demand.
For example, if you know your brand is in high demand (say you have already sold 100,000 units of another product), then having an MOQ of 150,000 units for your new skincare solution isn’t out of reach. In fact, it might work as a motivator to push your brand towards that goal.
But if you’re a newer or growing brand and have lower demand, a 150,000-unit MOQ could be intimidating or unattainable.
So, how do you actually measure your demand? Data from previous transactions is typically the backbone of demand projections. However, if you are a new beauty brand, you may not have that data. In this case, it’s smart to be cautious with your MOQs. Your attainable skincare manufacturing MOQ will depend less on demand and more on your budget as a whole and inventory capacity.
#2 – Determine Inventory Capacity
Maintaining inventory creates what’s known as holding costs, which can leave a dent in any beauty budget. When you have a higher MOQ, you naturally have to store more products. Do you have the room or the funds to pay for adequate storage?
Expiration dates also influence the right level of inventory. While many skincare products can last longer unopened, most products have a precise expiration date. Once that date is passed, efficacy diminishes and product safety is compromised. So, it’s important to have the right balance of inventory that you can actually sell long before that expiration date.
#3 — Calculate Your Break-Even Point
A break-even point is a price at which your brand has no profit or loss. While this may not be as relevant for large, global brands, it’s important for new and growing brands to know this number so you can set goals to exceed it, resulting in a profit.
The break-even point typically serves as the baseline for MOQ determination, as it involves elements like holding costs, overhead and other expenses. The break-even point can be calculated by adding up your fixed costs and variable costs and then dividing by net revenue per unit sold.
It is typical to calculate costs for a few months out to plan for financial stability. Setting an MOQ just above a break-even point is a good place to start.
#4 — Develop a Strategy
Establishing a distribution, promotion and overall sales strategy is key to any business. With these strategies in place, you will be even more empowered to determine the right MOQ. When planning, some high-level questions you should answer are:
- Will you sell products in single, multiple or bundled units?
- What kind/how much packaging will you need to prepare your products for market?
- How much of your budget is allocated to product promotion and marketing?
- What is the approximate ROI on your product promotion and marketing plans?
- Will you distribute products regionally, nationally or globally? What are those costs?
The answers to each of these questions will aid in developing your strategies and will ultimately help you arrive at a realistic MOQ. The better your sales strategy is, the more accurate your sales projections will be, allowing you to aim for a precise MOQ.
Remember to Negotiate
There is almost always an MOQ negotiation between beauty brands and contract manufacturing partners.
If you plan to launch multiple SKU’s, a manufacturer will be more likely to reevaluate an MOQ based on the potential for reorders and overall growth. Manufacturers often consider the strengths and weaknesses of the entire business when negotiating MOQs, so make sure you’re prepared to talk details.
At the end of the day, a private label manufacturer is always more likely to lower an MOQ to meet your needs if you are currently creating multiple products with them or you plan to create more products with them in the future.
The MOQs for your brand’s new beauty products play a key part in the financial stability and growth of your business. Establishing manageable MOQs will give you peace of mind while still pushing you toward your ultimate goal. Don’t be afraid to voice your opinion and negotiate with your manufacturer to arrive at a number that suits your beauty brand.
TaikiUSA works with beauty brands to determine viable MOQs to increase overall revenue and scale their businesses. Let us know if you’re ready to start a project!