What Is Economic Order Quantity (EOQ)?
Economic Order Quantity (EOQ) is the order size that minimizes the combined annual cost of placing orders and holding inventory. For e-commerce merchants, it offers a starting point for deciding how much to buy at a time: larger orders mean fewer purchase orders, but more stock to store and finance.
EOQ is a model, not a guarantee of the lowest real-world cost. It assumes steady demand, stable costs, and replenishment arriving as planned; seasonality, supplier minimums, discounts, and stockout risk can change the best order size.
EOQ Formulas
EOQ = √(2 × D × S ÷ H)
- D = annual demand in units
- S = ordering cost per purchase order
- H = annual holding cost per unit
Annual holding cost per unit = Unit cost × Holding cost percentage
Annual ordering cost = (Annual demand ÷ Order quantity) × Ordering cost per order
Annual holding cost = (Order quantity ÷ 2) × Annual holding cost per unit
Relevant annual inventory cost = Annual ordering cost + Annual holding cost
The comparison includes ordering and holding costs, not the purchase cost of the goods. If the supplier offers quantity discounts, include those separately when comparing total landed costs. At the model’s optimum, annual ordering and holding costs are equal.
How to Use This Calculator
- Annual Demand — Enter the total units you expect to sell in a year. Use sales history adjusted for planned growth, promotions, or seasonal demand.
- Ordering Cost — Enter the cost of placing and receiving one purchase order, including staff time, communication, inspection, and quality checks. Do not include the cost of the goods.
- Unit Cost — Enter the supplier cost per unit. The calculator uses this with your holding-cost percentage to estimate the annual cost of carrying each unit.
- Holding Cost % — Enter the annual carrying cost as a percentage of unit cost. Include storage, insurance, capital tied up in stock, shrinkage, and obsolescence; 20–30% is a common starting range.
- Lead Time (Days) — Enter the time from placing an order until the inventory arrives. Use it to understand replenishment timing; EOQ does not by itself determine when to reorder.
- Selling Price — Enter your per-unit selling price for revenue projections. Revenue is not the same as profit because it does not subtract product or operating costs.
- Current Order Qty — Enter your typical order size to compare its estimated annual ordering and holding costs with EOQ.
Step-by-Step Example
Suppose a Shopify store sells a reusable water bottle and estimates annual demand of 4,000 units. It pays $15 per unit, spends $50 to place each purchase order, and estimates annual holding costs at 25% of unit cost.
First calculate the annual holding cost per unit:
$15 × 0.25 = $3.75 per unit per year
Then calculate EOQ:
√(2 × 4,000 × $50 ÷ $3.75) = √106,666.67 ≈ 327 units
Compare that quantity with a current order size of 500 units:
| Measure | EOQ: 327 units | Current: 500 units |
|---|---|---|
| Orders per year | 4,000 ÷ 327 = 12.23 | 4,000 ÷ 500 = 8 |
| Annual ordering cost | 12.23 × $50 = $611.50 | 8 × $50 = $400 |
| Average cycle stock | 327 ÷ 2 = 163.5 units | 500 ÷ 2 = 250 units |
| Annual holding cost | 163.5 × $3.75 = $613.13 | 250 × $3.75 = $937.50 |
| Combined annual cost | $1,224.63 | $1,337.50 |
The model estimates annual savings of $112.87 from reducing the order size. The result excludes purchase costs, safety stock, discounts, and any extra freight charges, so compare supplier terms before changing your purchase pattern.
Using EOQ for Reorder Decisions
EOQ answers how much to order, not when to order. A reorder point estimates when to place the next PO, generally using demand during lead time plus safety stock. For the example, average daily demand is 4,000 ÷ 365 ≈ 11 units; across a 14-day lead time, that is about 154 units before adding safety stock. Use the Reorder Point Calculator to estimate the trigger and the Safety Stock Calculator to account for demand or lead-time variability.
A lower order quantity can reduce average inventory and storage exposure, but it increases PO frequency and administrative work. A larger order can make sense when a supplier discount or freight break exceeds the added holding cost; test the full cost rather than treating the EOQ result as a mandatory order size. The Stockout Cost Calculator can help assess the other side of the decision: lost sales and other costs when stock runs out.
Planning Benchmarks by Product Type
These are planning categories, not universal industry averages. Start with your actual storage, financing, and loss costs; the U.S. Small Business Administration’s guide to managing business finances explains why inventory and cash-flow planning belong in the same review.
| Product type | Holding-cost planning | EOQ adjustment to consider |
|---|---|---|
| Durable, compact goods | Start with the common 20–30% annual carrying-cost range, then replace it with your cost data. | Compare storage and financing costs with supplier order fees. |
| Bulky or slow-moving goods | A standard percentage may understate warehouse-space and obsolescence costs. | Test smaller orders and review inventory turnover using the Inventory Turnover Calculator. |
| Seasonal or trend-sensitive goods | The cost of leftover stock may rise sharply after peak season or a trend change. | Calculate separate quantities for peak and off-season demand; do not treat annual demand as evenly distributed. |
| Perishable goods | Expiration and spoilage can make the simple holding-cost estimate incomplete. | Add expected waste to the comparison and prioritize sell-through timing. |
For broader retail context, the U.S. Census Bureau’s retail trade data tracks sales and inventory at an aggregate level. Those figures can help you understand market trends, but they are not substitutes for SKU-level demand and cost inputs.
6 Ways to Test Your Inventory Policy
- Change annual demand from 1,200 to 1,500 units to see how a growth forecast affects EOQ and annual order frequency.
- Raise ordering cost from $30 to $45 per PO if receiving procedures or supplier coordination take longer than expected; higher ordering costs tend to increase the modeled order size.
- Increase holding cost from 20% to 32% for a product with costly storage or high obsolescence risk; the model will favor smaller batches.
- Compare a supplier’s MOQ with the calculated EOQ. If the MOQ is higher, calculate the extra holding cost and ask whether a price break offsets it.
- Use Shopify sales reports to separate peak and non-peak demand. Test each period’s demand instead of placing one annual average into a seasonal buying plan.
- Review slow sellers before reordering. A lower EOQ does not make excess stock sell; check sell-through and markdown options with the Sell-Through Rate Calculator.
Frequently Asked Questions
What is Economic Order Quantity (EOQ)?
EOQ is the optimal order quantity that minimizes total inventory costs—the sum of ordering costs and holding costs. The formula is EOQ = √(2DS/H), where D is annual demand, S is ordering cost per PO, and H is holding cost per unit per year. At EOQ, ordering costs equal holding costs under the model’s assumptions, producing the lowest combined cost.
What is ordering cost in the EOQ formula?
Ordering cost is the cost of placing one purchase order, not the cost of the goods themselves. It can include staff time, supplier communication, receiving and inspection, quality checks, payment processing, and fixed shipping fees; higher ordering costs favor larger, less frequent orders.
What is inventory holding cost?
Holding cost is the annual cost of storing one unit of inventory, often estimated at 20–30% of unit cost. It can include warehouse space, insurance, capital tied up in stock, shrinkage, obsolescence, and handling; higher holding costs favor smaller, more frequent orders.
Does EOQ work for e-commerce businesses?
Yes, as a baseline, but EOQ assumes steady demand and predictable replenishment, while e-commerce sales can spike during promotions and seasonal peaks. Adjust the estimate for supplier minimums, discounts, lead-time variation, and stockout risk; many merchants apply detailed EOQ analysis to their highest-impact SKUs first.
How sensitive is EOQ to changes in inputs?
EOQ is relatively robust because total cost often changes gradually near the optimum, so a practical order size can be close to the calculated result. Compare the calculator’s cost estimates for realistic supplier quantities rather than rejecting a useful MOQ solely because it differs from EOQ.
About This Calculator
The Economic Order Quantity (EOQ) Calculator was built by Luis Dev Studio for Shopify merchants comparing order sizes and inventory costs. For help applying inventory analysis to your store, contact us or explore our Shopify services.
Updated by Luis Gonzalez · Apr 15, 2026