Minimum Purchase Requirements: Yea or Nay?

Without a doubt, filling one-off orders can get expensive. Whether the sale is worth a few dollars or a few hundred dollars, you still need to track the order; pick, pack, and deliver the product; and invoice the customer.

So it’s not surprising that many business-to-business merchants find the idea of implementing a minimum purchase requirement appealing.

“Minimum orders help create standardization and efficiencies in fulfillment,” says Barry Litwin, vice president/general manager of Block & Co., a provider of banking supplies based in Wheeling, IL. They also boost a company’s average order size. In addition, by shipping in larger quantities, such as cases or cartons, the merchant might be able to gain volume discounts when negotiating freight charges.

Minimum order requirements are also one way merchants can test a customer’s validity, says Tom Shinick, president of Corporate Development Partners, a consulting firm in Merrick, NY. “A lot of times in b-to-b, you get people who cherry-pick.” They may split an order for several hundred dollars’ worth of goods among four or five vendors so that they can get the lowest price on each item. If they do that regularly, few suppliers will be able to make money working with them.

Competitive disadvantage

Despite these benefits, however, Litwin, Shinick, and many others hesitate to impose minimum purchase requirements. The reason? Competition. Making it easy for customers to order from you — whether they’re purchasing one item or one hundred — provides a competitive advantage.

Vic Hunter, president of Hunter Business Group, a Milwaukee-based b-to-b marketing consultancy, has completed several loyalty surveys with firms that sell to other businesses. Responses on all indicated that ease of doing business is a key factor — it was cited by more than one-third of respondents in one survey — in an owner’s decision to work with another company, he says. Minimum purchase requirements, in contrast, often are seen as an obstacle to working with a company.

“If we prohibit people from being able to buy just one product, that could cause them to seek other vendors,” says Steve Decker, owner/president of Architectural Supplements, a Waterbury, CT-based supplier of plant containers. “And any customer that buys one item is capable of buying far more than one.”

For Architectural Supplements, Decker adds, small orders are just part of doing business. The architects and designers to whom the company sells often need to show one product to a client before they can get approval to order more. Or they may need just one or two more items to put the finishing touches on a design. And the volume of small orders is low enough — Decker estimates less than 1% of sales — that it wouldn’t pay Architectural Supplements to monitor them in order to enforce a minimum purchase requirement.

What about consumers who contact Architectural Supplements to gain access to wholesale pricing but want to order only one or two items? For the most part, this isn’t an issue, Decker says, as the containers his firm sells are larger than what most people would use in their homes. When this does occur, Decker or an associate will charge list price, which is higher than the prices that b-to-b buyers pay.

To be sure, as more businesses offer e-commerce capabilities, the likelihood that consumers will find them online increases, says Mary Ann Kleinfelter, director of marketing with North Andover, MA-based L-com Connectivity Products. As a result, companies can receive small orders from individuals they never would directly target in their marketing.

If your company is fielding a growing number of consumer orders, it makes sense to consider whether the trend signals a business opportunity, Kleinfelter adds. “Ask if the consumer portion of your business has legs, and if so, see if you want to pursue it.”

But don’t assume a particular order is from a consumer. It’s not unusual for small-business owners to use e-mail addresses from AOL or Yahoo!, Kleinfelter notes.

Big efficiencies for small orders

Although minimum purchase requirements can be competitive suicide, many merchants want to obtain the efficiencies inherent with larger orders. A number of tactics let them do this.

By offering volume pricing, for example, so that customers pay less per unit when they purchase in larger quantities, you are in effect passing on to the customer the operational savings inherent in fulfilling fewer but larger orders. You can also offer incentives, such as free shipping or a premium, when customers’ orders hit a predetermined level, says Kleinfelter. An L-com customer whose order hits at least $100 can receive a keychain, while one whose order hits $250 can get a tool kit.

Or you can package lower-cost items together or with higher-cost items to boost the total order size, Kleinfelter says. For example, a merchant may cut the price of a $99 machine accessory to $49 when it’s purchased with the machine, which is priced at $2,000.

Another tactic, says Litwin of Block, is to “upsell to try to drive a higher order size.” When talking with clients, Block’s customer service representatives mention products that are on sale and ask if the customer is interested in purchasing any. Or they will identify other products that are a natural complement to the product the customer already is purchasing. For instance, they’ll ask if a customer purchasing a coin tray also needs coin wraps.

You can also set your shipping and handling charges so that they cover the higher costs of filling smaller orders. Architectural Supplements has a minimum freight charge for orders of items larger than 24 inches. The charge varies from $90 to $175, depending on the delivery location, and covers the premium the freight carrier charges, Decker says.

If a customer is purchasing just one or two items, the freight charge will be a significant portion of the total bill. Nonetheless, offering the option to place a small order, albeit with higher shipping charges, lets the customer decide whether to make the purchase, Decker says.

In fact, Hunter says, it’s not unusual for S&H charges on smaller orders to exceed the cost of the items purchased. Not surprisingly, most business customers try to avoid placing these. Sometimes such purchases are necessary, though — a business may need a small, inexpensive part to get a machine up and running. In that instance, Hunter says, most will order the part, accepting the higher delivery charge to get the machine back in operation as quickly as possible.

Keep in mind that success in b-to-b is based on building mutually beneficial relationships, says Hunter. Minimum order levels, in contrast, place the focus on a single transaction. “They’re counter to what you want to do in business-to-business relationships,” he says.


Chanhassen, MN-based Karen M. Kroll has written for American Way, Business Finance, and Inc., among other publications.

Small orders can be beautiful

WholesaleDiscoveries.com has found that targeting customers who buy in small quantities can form the foundation of a successful business. WholesaleDiscoveries.com is a division of St. Petersburg, FL-based Famous Discoveries, which develops and markets a range of products, including Stainz-R-Out cleaning products and Digital iDia consumer electronics products. WholesaleDiscoveries.com offers small businesses that pay a monthly fee of $12.99 the ability to order products in any amount they want, says Bill Barlow, Famous Discoveries’ CEO.

To make this work, WholesaleDiscoveries.com had to put in place a warehousing and logistics information system that allows it to track and deliver orders for several hundred SKUs. Many orders are drop-shipped to its members’ clients, so the system has to track the order history and delivery information for both sets of customers. “This was a huge commitment to build this system,” Barlow says.

Since its launch in mid-2005, WholesaleDiscoveries.com has grown to more than 6,600 business members, and that number continues to increase by about 175 each month, Barlow says. About 4,000 of these members purchase from the company regularly. “We’ve found a good niche,” he says.
KMK

Implementing a minimum purchase requirement

Some merchants, such as those that sell lots of small-value items, may decide that the benefits of minimum purchase requirements outweigh the risks. If so, they’ll want to implement a policy with care.

As a starting point, they need to determine their approximate cost to process each order, says Tom Shinick, president of consultancy Corporate Development Partners. This includes the expense of picking the item from its location in the warehouse, packing it, delivering it, and tracking the entire transaction. They also need to know their average gross margin to determine how much of the processing cost is covered in the price of the goods. (For more on calculating fulfillment cost per order, see “Made to Order” in the December 2005 issue of Multichannel Merchant.)

From there, the merchant can begin calculating a reasonable minimum purchase level. Say that the cost to process an order is $5, and the gross margin is 40%. A minimum purchase quantity of $20, with a gross margin of $8 ($20 multiplied by .40) would cover the processing costs, with some to spare.

Most merchants will need technology to make the policy work, says Barry Litwin, vice president/general manager of banking supplies manufacturer/marketer Block & Co. With online orders, for instance, the Website should prompt the customer to add to his order if it falls below the minimum. The prompt should identify additional items that complement the one(s) the customer already is purchasing, by saying something like, “Here are three other items you’ll need with your purchase.”

Appropriately training customer service representatives is critical as well. Most companies will want to bend the rules on occasion for their better customers or when an order falls below the minimum because an item being purchased is on backorder. Customer service employees need to know when to waive the minimum purchase requirement. They also need some way to override any automated system that is used to enforce the requirement. In addition, Litwin says, management will want some way to check how frequently employees bypass the minimum purchase requirement.
KMK

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