Economic order quantity is the number of units to buy each time you reorder a product, chosen so that what you spend on placing orders and what you spend on storing stock add up to the smallest possible total. Order too little too often and you pay freight and admin again and again. Order too much and your cash sleeps on a shelf.

It concerns any seller who buys stock in batches: a creator restocking merch, a brand ordering from a factory, a boutique buying from wholesalers. You do not need to compute it to the unit. You need to know which direction you are wrong in, because most small sellers order too small or far too large.

What is economic order quantity (EOQ)?

EOQ is a quantity, in units, that results from balancing two opposite costs:

  • Ordering cost: what each purchase order costs you regardless of size. Your time to place it, inbound freight (often a flat or near-flat amount per shipment), customs paperwork, receiving and counting. Larger orders spread this over more units.
  • Holding cost: what it costs to keep one unit in stock for a year. Storage, insurance, the cash tied up that could earn or save elsewhere, shrinkage, and the risk the product goes stale. Smaller orders keep this low.

Plot total cost against order size and you get a curve with a bottom. EOQ is the order size at the bottom.

What EOQ is not:

  • It is not the minimum order quantity. MOQ is the supplier's floor. EOQ is your optimum. When the MOQ is above your EOQ, you buy the MOQ and know you are paying for it.
  • It is not safety stock. Safety stock protects against surprises. EOQ decides how much to buy each time; it says nothing about when.
  • It is not a forecast. EOQ takes annual demand as an input. If the demand figure is wrong, the answer is wrong.

Vocabulary: ordering cost or setup cost (per order), holding cost or carrying cost (per unit per year, often expressed as a percentage of unit cost), annual demand, order cycle (days between orders), and reorder point (the stock level that triggers the order).

Why it matters

Batch size is a quiet decision with a loud effect on cash.

A tea brand sells 2,400 tins a year of its best seller, 200 a month. Each tin costs $6 from the supplier. Every purchase order costs about $90: an hour of the founder's time, a $60 freight charge and receiving. Holding a tin for a year costs about 25% of its value, so $1.50, once storage, capital and the risk of a batch passing its best-before date are counted.

The founder currently orders 100 tins twice a month. Ordering cost per year: 24 orders × $90 = $2,160. Average stock is half the order, 50 tins, so holding cost: 50 × $1.50 = $75. Total: $2,235.

A friend suggests ordering 1,200 twice a year for simplicity. Ordering cost: $180. Average stock 600 tins: $900 holding. Total: $1,080. Better, but $3,600 of cash sits in tea at the start of each cycle, and half the tins are eight months old when sold.

EOQ, computed below, is 537 tins, so about 4.5 orders a year. Ordering: about $400. Holding: 268 × $1.50 = $402. Total: about $800. Compared to the current habit, that saves roughly $1,400 a year on one SKU and halves the peak cash outlay compared to the twice-a-year plan. Across 15 SKUs, the pattern repeats.

How to calculate it

The formula:

EOQ = √( (2 × D × S) / H )

where D is annual demand in units, S is the cost per order, and H is the holding cost per unit per year.

Step by step for the tea tin:

  • D, annual demand: 2,400 tins. Use the last 12 months, adjusted if you expect growth.
  • S, ordering cost: $90. Add your time at a realistic hourly rate, freight per shipment, any per-order fees, and receiving time.
  • H, holding cost: $1.50. Take the unit cost, $6, and multiply by an annual carrying rate. 20 to 30% is typical for small sellers; use 25% unless you have a reason not to.
  • Compute: 2 × 2,400 × 90 = 432,000. Divide by 1.50: 288,000. Square root: about 537.
  • Orders per year: D ÷ EOQ = 2,400 ÷ 537 ≈ 4.5, so an order every 11 to 12 weeks.
  • Round to reality: the supplier ships cartons of 48, so order 528 or 576. The cost curve is flat near the bottom; being 10% off the exact EOQ changes total cost by under 1%.

Because the curve is flat near the optimum, the formula is forgiving of rough inputs. Estimating S at $70 instead of $90 moves the EOQ from 537 to 474; the total cost barely moves. What matters is avoiding orders that are 3 to 5 times too large or too small.

Benchmarks and examples

Ranges that fit most small online sellers:

  • Ordering cost (S): $30 to $150 for domestic suppliers; $300 to $1,500 for overseas orders once freight, customs and inspection are included.
  • Holding rate: 20 to 30% of unit cost per year for durable goods; 35 to 50% for perishable, seasonal or fashion items where the risk of obsolescence is high.
  • Order frequency that results: monthly to quarterly for domestic; 2 to 4 times a year for overseas.

Typical situations:

  • A creator selling one hoodie design. 1,800 units a year, $14 unit cost, $120 per order to the print shop, 25% holding. EOQ ≈ 351, about 5 orders a year. If the print shop's MOQ is 500, order 500 and accept the small extra holding cost.
  • A skincare brand with an overseas jar supplier. 6,000 jars a year at $0.80, $900 per order (freight and customs), 25% holding, so H = $0.20. EOQ ≈ 7,350, more than a year of demand. Here the right answer is to order a year's supply or split with air freight in emergencies, because the ordering cost dominates.
  • A boutique buying from a wholesaler with free shipping over $500. Ordering cost is mostly the founder's time, say $25. Unit $18, 25% holding, H = $4.50, demand 600. EOQ ≈ 82, about 7 orders a year. Group several SKUs into one order to pass the free-shipping threshold.

Common mistakes

  • Ignoring your own time in the ordering cost. A "free" order that takes two hours to place, chase and receive costs $50 or more. Count it.
  • Using the purchase price as the holding cost. Holding cost is a fraction of the unit cost per year, not the unit cost itself. A tin that costs $6 does not cost $6 to hold.
  • Applying EOQ to a product with a short shelf life or a trend. A candle scent that sells for one season should be ordered for the season, not for the curve.
  • Treating EOQ as a precise target. The curve is flat. Round to carton sizes and freight breaks, and move on.
  • Forgetting that demand changes. An EOQ computed on last year's 2,400 units is wrong the year you sell 6,000. Recompute when sales move by more than 30%.

Best practices

  • Compute EOQ only for your A products. The top 20% of SKUs by revenue justify the effort. The rest can follow a simple order-to-cover rule.
  • Write down your S and H once. One ordering cost per supplier, one holding rate for your business. Reuse them for every SKU.
  • Check EOQ against MOQ and price breaks. If the supplier offers 8% off at 1,000 units and your EOQ is 800, compare the discount to the extra holding cost of 200 units. Often the discount wins; sometimes it does not.
  • Pair EOQ with a reorder point. EOQ says how much. The reorder point, demand during lead time plus safety stock, says when. Together they make a complete rule.
  • Group orders to the same supplier. Placing one order for five SKUs shares the ordering cost, which lowers S per SKU and lets each SKU's optimal batch shrink.
  • Watch cost of goods sold, not just unit price. Freight, duties and holding are part of what a unit really costs you. EOQ is one lever on that number.
  • Recompute twice a year. Ten minutes with a spreadsheet, whenever you review stock.

In Roctify

Roctify provides the demand side of the EOQ calculation. Every order from your link in bio and your online store draws on one shared catalog, so units sold per product and per variant are counted once and accurately. With sales reports and exports (Pro plan) you pull the units sold per SKU over the last 12 months, which is the D in the formula, and you see current stock per SKU to know where you stand against the reorder point.

The platform does not place purchase orders or compute EOQ for you. It keeps your stock and sales figures honest, charges 0% transaction fees on every plan so the margin you protect with smarter batching stays yours, and lets you update quantities in one place when the delivery arrives.

FAQ

Do I really need EOQ as a small seller?

You do not need the exact number, but the reasoning saves real money. Most small sellers either reorder every week in small quantities, paying freight and time over and over, or buy six months at a time and starve their cash. Running the formula once on your best sellers shows which side you are on. After that, ordering roughly the right batch size becomes a habit.

What if the supplier's minimum order is higher than my EOQ?

Then you order the minimum and accept the extra holding cost, or you negotiate. Compute the extra cost: for a hoodie with an EOQ of 350 and an MOQ of 500, the extra 150 units at $14 and a 25% holding rate cost about $260 a year in carrying cost. If that is less than the margin you would lose by not stocking the product, buy the 500. If it is not, look for another supplier or a product with a lower MOQ.

How do I estimate holding cost without a warehouse?

Even a spare room has a holding cost. Add the share of rent or storage you attribute to stock, insurance if any, a capital cost (what the cash would otherwise save you, 5 to 10% a year is fair), and an allowance for damage, loss and products going out of date or fashion. For most small sellers, this adds up to 20 to 30% of the unit cost per year. Use 25% if you are unsure.