Too Much Shrimp, or, The Curse of the MOQ

Too Much Shrimp, or, The Curse of the MOQ copy

Anyone who’s ever stepped into a Costco is familiar with the concept behind a “Minimum Order Quantity” (MOQ): “Buy 10 or more for 10% off”. And while you might be tempted by ten pounds of Cap’n Haddock’s Spicy Teriyaki Shrimp, if you’re a creator of a new product dealing with suppliers and manufacturers, you’re often better off showing more restraint.

Many suppliers and manufacturers will offer substantial discounts for large MOQs, and many creators launching their first project will chase after these discounts by scaling up their production quantities to qualify for the discounts. That’s understandable… lower costs equals higher profits, right?

We think that’s usually a major mistake. Here’s why.

Huge Demand Doesn’t Mean Huge MOQs

First, let’s dispel the myth that a massive demand for a product means you need to manufacture at a massive scale. Certainly, the goal of nearly every crowdfunding campaign is to realize as much demand as possible, which requires everything from a stellar outreach plan to a frictionless checkout process.

So, what happens if you get swamped with orders? On Crowd Supply, the estimated ship date listed for a product is automatically adjusted based on the number of orders already placed and the delivery schedule for that particular product. This not only properly sets backer expectations about when they will receive their order, but it also means you can plan from the beginning for production batches that start out in low quantities and scale up in a way that makes sense for your product.

Never Getting Off the Ground

A high MOQ means a low cost per unit produced, but a high cost of getting started producing any units at all. This situation tempts many creators to set a correspondingly high crowdfunding goal before they even know the demand for the product. Assuming a high MOQ and setting a high funding goal presumes knowledge of demand for the product, yet gauging demand is one of the main benefits of running a crowdfunding campaign in the first place.

Even if there is great demand for the product, chances are good the demand won’t fully manifest during the campaign. It’s not unheard of for campaigns to raise more funds during the pre-order period than the initial crowdfunding campaign due to some combination of luck and better messaging forged over the course of the campaign. Setting a high funding goal to meet a high MOQ cuts off these paths to success by requiring high demand and refined messaging out of the gate. Shooting for the low per-unit cost of ten pounds of shrimp might end you up with no shrimp at all.

Money Down the Drain

Let’s say you make it over that initial hurdle of raising the considerable sum needed to afford a high MOQ. There is still tremendous risk in going straight into a high MOQ production run. Don’t be mistaken – pre-sales and crowdfunding pledges are debt, not equity. You have a financial obligation to your manufacturer to pay them, and an obligation to backers to get them the final product. With a high MOQ production run, you essentially have only one chance to get it right – you better hope those 10,000 shrimp you just bought are good.

By planning for smaller production runs, you pay for only what you need and can then scale up from there. Did you plan to manufacture 100 units, but ended up pre-selling thousands during your crowdfunding campaign? Focus first on delivering those 100 units according to the original plan, then scale up.  Should you discover a design flaw or another issue, you minimize your financial risk in each iteration.

No Room to Maneuver

Design is essential – as are your first customers. Don’t be surprised if you uncover new design improvements, potential design flaws, or decide to add new features to your product mid-run. Once you make that order, it’s difficult (if not impossible) to change the production plan.

If you throttle your manufacturing runs in lower quantity bursts, you avoid being locked into a gazillion disappointing or downright flawed units. That’s not just a financial risk — it’s your reputation. Plus, it gives you the chance to integrate customer feedback into subsequent runs.

portland-press-parts-2_jpg_project-bodyTake the Portland Press, for example. Its creators discovered a serious design issue when they went to do final assembly of their first run of production – a part had been manufactured incorrectly and didn’t fit. They came up with a workaround to modify the incorrect parts while only adding a short delay. If they had ordered a massive amount of these parts, it would be have been difficult, time-consuming, and expensive for them to pivot. Also, while the workaround was functional, it was not optimal, so they offered to replace the part for any customer who desired it, an offer which would have been catastrophically expensive if they were dealing with large quantities.

A similar correction might have saved the now infamous Zano Drone project, which crashed and burned in part due to a large amount of capital being locked into high MOQ inventory purchases that were never used.

Strain on the Supply Chain

A large MOQ has a ripple effect throughout your supply chain. You will need to scale up your orders of all components needed for your product. This can introduce new issues and added risk. For example, you don’t want to be in the position of having to store thousands of partially completed products because a single essential component is held up by a manufacturing glitch or weather-related delay.

Quality Assurance and Testing Woes

On the one hand, this point seems obvious. The more units you need to test and inspect at the end of the manufacturing process, the more time and labor is required. In some cases, it’s possible to move from inspecting every unit to spot checking a smaller number of units, but even that incurs nontrivial overhead to do properly. For example, a nontrivial amount of effort goes into implementing and maintaining a randomized selection process that gives a representative snapshot of the entire production line. And, of course, if testing reveals an issue, it will be harder and more expensive to fix the issue if large quantities are involved.

Conclusion

Don’t be tempted by the promise of spending less in exchange for buying in bulk — your first run should always be a small MOQ. Once you’ve tested and delivered that batch, you can then scale up to larger quantities. Set realistic timelines, scale up with intention, and get it right. By throttling your production runs, you’ll give yourself financial and logistical peace of mind and give your backers a better end product.

Are you ready to launch your crowdfunding campaign? Visit Crowd Supply to see how we’re different. We’d love to learn more about your project.

Josh Lifton

About Josh Lifton

Josh Lifton is the CEO and co-founder of Crowd Supply, a crowdfunding platform focused on physical, manufactured goods and hardware. He received his doctorate from the MIT Media Lab and holds a BA in physics and mathematics from Swarthmore College, which is to say he's devoted a significant amount of his time learning how to make things that blink. As head of Crowd Supply's project efforts, he is helping others do the same.
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