What is Economic Order Quantity (EOQ)?

EOQ is the order size that minimises the total annual cost of ordering and holding inventory. It balances the cost of placing many small orders against the cost of storing large quantities.

What is the EOQ formula?

EOQ = √(2 × D × S / H), where D is annual demand in units, S is the cost of placing one order, and H is the annual holding cost per unit.

What should I use as holding cost?

Holding cost (H) is typically estimated at 20 – 30% of unit cost per year for most ecommerce products. It includes warehouse cost, capital cost (money tied up in stock), insurance, and obsolescence risk. Electronics and seasonal fashion carry higher rates due to faster depreciation.

Does EOQ work when there are minimum order quantities?

When your supplier's MOQ is higher than your calculated EOQ, you must order at MOQ. In this case, use the total cost formula TC(Q) to compare the cost of ordering at MOQ versus negotiating a lower threshold.

Should I use EOQ for every SKU?

EOQ works best for high-volume, stable SKUs. For very slow-moving products (fewer than 20 – 30 units per year), the formula is less reliable. For perishable items, the extremely high effective holding cost means EOQ will favour very frequent small orders.

How often should I recalculate EOQ?

Recalculate every 6 months as a minimum, or immediately when annual demand changes by 20% or more, when your ordering cost changes (e.g. freight rate changes), or when your holding cost rate changes.

EOQ Calculator - Economic Order Quantity Formula for Shopify

Definition: Economic Order Quantity (EOQ) is the ideal order size that minimises the combined cost of placing orders and holding inventory - balancing ordering frequency against storage costs.

Every time you place an order, you pay a fixed cost - admin time, shipping minimums, processing fees. Every unit you hold costs money too - warehouse space, tied-up capital, insurance, and the risk of obsolescence. EOQ finds the order size that minimises the total of these two costs. Order too little too often and you pay more in ordering costs. Order too much too rarely and your holding costs balloon. The right number sits exactly at the point where these two cost curves cross.

EOQ Calculator (Economic Order Quantity) formulas

Classic Wilson formula

Use when: Use for any product with reasonably stable, continuous demand. The most widely used inventory formula.

EOQ = √(2 × D × S / H)

EOQ = square root of (2 × Annual demand × Cost per order / Annual holding cost per unit)

Symbol	Variable	Description
D	Annual demand(units / year)	Total units expected to sell in a year. Use your Shopify annual sales report for this.
S	Cost per order(£ / $)	Fixed cost of placing one purchase order - includes admin time, supplier setup fees, inbound freight, and any per-order processing costs.
H	Annual holding cost per unit(£ / $ per unit per year)	Total annual cost of storing one unit. Typically estimated as 20 – 30% of unit cost, covering warehouse rent, capital cost, insurance, and shrinkage.

Limitation: Assumes constant demand rate and ignores quantity discounts, minimum order quantities, and perishability.

EOQ with quantity discount

Use when: When your supplier offers price breaks at higher quantities. Calculate total annual cost for the standard EOQ and each discount threshold, then choose the lowest.

TC(Q) = (D/Q) × S + (Q/2) × H + D × P

Total annual cost = (Annual demand / Order quantity) × Ordering cost + (Order quantity / 2) × Holding cost + Annual demand × Unit price

Symbol	Variable	Description
Q	Order quantity being evaluated(units)	Test each candidate quantity - standard EOQ and each discount threshold.
P	Unit purchase price at this quantity(£ / $)	Changes at each discount breakpoint - lower price for higher quantities.
D	Annual demand(units / year)	Total expected annual sales.
S	Cost per order(£ / $)	Fixed ordering cost.
H	Holding cost per unit per year(£ / $)	Annual cost to hold one unit in stock.

Limitation: Requires knowing your exact holding cost rate - often underestimated by ecommerce brands.

Defect-adjusted EOQ

Use when: When you have a known defect, return, or rejection rate from a supplier. Common for brands sourcing from overseas manufacturers.

EOQ_adj = √(2 × D × S / (H × (1 − p)))

Adjusted EOQ = square root of (2 × Annual demand × Ordering cost / (Holding cost per unit × (1 − defect rate)))

Symbol	Variable	Description
p	Defect / rejection rate(decimal (e.g. 0.05 = 5%))	Proportion of units in each order that are defective or returned. Increases effective demand because you need to buy more to get the usable quantity you need.
D	Annual demand (usable units)(units / year)	Units you need to sell - not including replacements for defects.
S	Cost per order(£ / $)	Fixed ordering cost.
H	Holding cost per unit per year(£ / $)	Annual holding cost.

Step-by-step examples

Scenario: “A Shopify electronics brand sells 1,200 units of a product per year. Each order costs £50 to place (admin + freight). Holding cost is £8 per unit per year.”

Annual demand (D): 1,200 units

Ordering cost (S): £50 per order

Holding cost (H): £8 per unit per year

1EOQ = √(2 × 1,200 × 50 / 8)
2EOQ = √(120,000 / 8)
3EOQ = √15,000 = 122.5 → round to 123 units
4Number of orders per year = 1,200 / 123 = ~10 orders
5Time between orders = 365 / 10 = ~37 days

Optimal order quantity = 123 units (~10 times per year)

Interpretation: Order 123 units roughly every 37 days to minimise your combined ordering and holding costs. Adjust if your supplier has a minimum order quantity.

Scenario: “Supplier offers a 5% discount if ordering 200+ units. Unit price standard: £20. Discounted: £19. Annual demand: 1,200 units. S = £50. H = 30% of unit price.”

Annual demand (D): 1,200 units

Ordering cost (S): £50

Standard unit price: £20 → H = £6/unit/year

Discounted unit price (200+ units): £19 → H = £5.70/unit/year

1Standard EOQ = √(2 × 1,200 × 50 / 6) = √20,000 = 141 units
2TC at 141 units: (1,200/141)×50 + (141/2)×6 + 1,200×20 = £425 + £423 + £24,000 = £24,848
3TC at 200 units (discount): (1,200/200)×50 + (200/2)×5.70 + 1,200×19 = £300 + £570 + £22,800 = £23,670
4Savings from discount: £24,848 − £23,670 = £1,178 per year

Order 200 units at the discounted price - saves £1,178 per year

Interpretation: The quantity discount makes ordering at the threshold more economical than the pure EOQ. Always compare total annual cost including purchase price, not just ordering and holding costs.

Typical holding cost rates by product category

Category	Benchmark	Note
General merchandise / non-perishable	20 – 30% of unit cost per year	Standard assumption for most ecommerce products.
Electronics	25 – 35% of unit cost per year	Higher due to obsolescence risk and rapid depreciation.
Fashion / seasonal items	30 – 40% of unit cost per year	High markdown risk at end of season inflates effective holding cost.
Perishable goods	50%+ of unit cost per year	Expiry risk makes overordering very costly. EOQ favours frequent small orders.
Low-value, stable items	15 – 20% of unit cost per year	Stationary, consumables. EOQ usually suggests larger, less frequent orders.

Holding cost includes capital cost (interest or opportunity cost of tied-up cash), storage cost, insurance, shrinkage, and obsolescence risk. Many brands underestimate this at 10% when the true rate is closer to 25%.

Critical pitfalls to avoid

Using revenue instead of unit count for D

EOQ requires a unit quantity for D, not a monetary value. Plugging in annual revenue produces a meaningless result.

Fix: Use total units sold per year from your Shopify sales report.

Underestimating holding cost

Many merchants estimate H at warehouse rent only and ignore the opportunity cost of capital, insurance, and obsolescence. A 10% H estimate when reality is 25% leads to over-ordering.

Fix: Use 20 – 30% of unit cost as a conservative starting point and refine from your actual cost structure.

Ignoring minimum order quantities

If your supplier's MOQ is 500 units but your EOQ is 120, the formula is irrelevant in its pure form. You'll always order at MOQ.

Fix: When MOQ > EOQ, recalculate total cost at the MOQ and decide whether to negotiate the MOQ down or accept the holding cost.

Using monthly demand instead of annual

Entering D = 100 (monthly units) and H = £2 (annual holding cost) creates a unit mismatch. EOQ formula requires consistent time units.

Fix: Use annual demand and annual holding cost throughout, or convert everything to a common period.

Not updating EOQ as demand changes

EOQ is sensitive to demand. If your annual sales grow 40%, your optimal order quantity changes significantly. A static EOQ from two years ago may be wildly wrong today.

Fix: Recalculate EOQ every 6 months, or when demand changes by more than 20%.

Shopify-specific tips

Pull annual demand from Shopify Analytics > Sales by product over your chosen 12-month period. Use units sold, not revenue.
Ordering cost (S) for Shopify brands typically includes: time to create and send a PO, any bank transfer or payment processing fees, and a portion of inbound freight if not built into unit price.
Holding cost estimation: if you use a 3PL, check your monthly storage invoice and divide by average units stored to get a per-unit-per-month rate. Multiply by 12 for annual H.
Shopify does not calculate EOQ natively. If you use an inventory planning app, check whether it factors in your ordering and holding costs or simply uses a demand-based reorder quantity.
For seasonal Shopify brands, consider calculating a separate EOQ for peak season (using peak D) and off-season. One EOQ across the full year will under-order in peak periods.

EOQ Calculator (Economic Order Quantity)