Should you have a minimum order value?

There are two schools of thought amongst the (admittedly small) sample of small business owners I have spoken to about this question.  One camp was totally against a minimum order value as they felt it creates an artificial barrier that might prevent a new client from placing their first order.

The second group was in favour of a minimum order value as they thought it would eliminate the very small orders that make no profit because of the high order processing / production costs compared to the low order value / profit.

I suspect there is no “right” answer.  It depends on the nature of your small business and how efficient you can be at processing small orders.  If you run a small business in which processing orders involves setting up machinery to produce the goods (such as printing or manufacturing plant) then the overhead costs of this set up has to be spread over the production run.  A short run means higher cost per item.

Anyone who has been involved with printing – such as buying letter-headed paper, business cards or leaflets – will know that the cost of 2,000 copies isn’t very much more than the cost of 500 copies.  The printing set up costs represents the bulk of the project’s cost and this is the same whatever size of print-run is performed.  Printing 2,000 copies rather than 500 copies requires only marginally more investment in paper and ink.

If, however, you run a business that is predominately a warehousing and shipping operation (like a small scale Amazon), then order size is probably not as relevant.  The overhead costs of picking and packaging each order can be built into the post & packing charge levied on the buyer.

I agree totally with the strategy of avoiding unnecessary artificial barriers that might get in the way of new clients placing a small, trial order.  It is usually hard enough to secure new clients when fighting against competitors, so adding one more barrier is giving your prospect one more reason to look elsewhere.

I would be inclined to encourage new clients place orders of any size – even if the first ones were loss making.  Once they had experienced your service, quality and the other benefits of buying from you, then you could consider engaging them in discussions about their small order sizes.  If they are happy with their earlier purchases, they should be reasonably happy to agree to a less frequent ordering pattern, with each order for greater volumes.

Another approach I’ve seen work is that new clients are given 3 – 6 months of placing orders of any size.  After that, they are told that orders below a certain threshold will attract a premium price to cover higher processing costs.  Most quickly adapt to placing larger orders, less frequently.

Sometimes your client will be dealing with some sort of crisis, requiring delivery of a small (but vitally important) order.  If you implement an inflexible minimum order size, you could well be adding to the client’s problems by rejecting their order as too small.

You have to find ways of helping all your clients and avoid introducing artificial barriers.  It must be best if you willingly accept orders of all sizes.  You can easily remind your clients of the implications of the submitting small orders once they have developed a pattern of small order purchases.

It can never be a good strategy to introduce additional barriers in the buying process.  Think about how much easier you can make it for prospects and clients to buy from you.

So, scrap your minimum order size barrier but consider introducing a maximum size limit for new clients.  This might seem a strange suggestion but if you have never dealt with the client before, receiving a massive order might carry unnecessary risks.  If payment is made at the time of order, then some of the risks immediately disappear.  But if you have to raise an invoice after delivery / installation, you have no previous dealings with the client to assess how quickly they will settle their invoice.

A massive order where you fund the base material cost combined with a client taking extended credit by paying your invoice late (or not at all) will give you some financial indigestion.  By limiting the maximum order size, you can control the potential impact on your cashflow should your client turn out to be a slow payer.

ACTION IDEAS

  1. Analyse your orders / sales and assess how big an issue small orders are within your business.
  2. Develop a (friendly) process for explaining to clients they must try to increase the size of their orders, to allow you to continue offering the best after-sales service.
Posted in Sales / Business Growth