What is economic order quantity (EOQ)? The Wilson formula, a DTC worked example, and where it breaks

Economic order quantity (EOQ) is the order size that minimizes the sum of ordering cost and holding cost across a year. It is also called the Wilson formula, after the inventory math R.H. Wilson popularised in 1934. For direct-to-consumer (DTC) and ecommerce brands, EOQ is best used as a sanity-check and trade-off diagnostic, not a rigid rule. The textbook formula is EOQ = sqrt(2DS/H), where D is annual demand in units, S is the cost of placing one purchase order (PO), and H is the cost of holding one unit for a year.

Every operator eventually asks the same two questions: how much should I order, and how often? EOQ answers the first. Order too little and you burn cash on freight, brokerage, QC, and inbound receiving every six weeks. Order too much and you tie up working capital, pay 3PL storage, and eat shrink and obsolescence. The Wilson formula is the cleanest way to see that trade-off in one number. It will not tell you when to reorder, that is the reorder point. It will not handle minimum order quantities (MOQs), container fills, seasonality, or cash constraints. But it gives you a defensible base case to argue from when your factory pushes back on order size or your 3PL pitches a longer storage contract.

How it works

The full formula is EOQ = sqrt(2 multiplied by D multiplied by S, divided by H). Worked DTC example. A brand sells 24,000 units a year of a $12 landed-cost SKU. Carrying cost is 25% of inventory value per year, so H is 0.25 multiplied by $12 which equals $3.00 per unit per year. The cost of placing one PO (planning, freight booking, customs brokerage, wires, QC, inbound receiving) is $1,200. Plug it in: EOQ equals the square root of (2 multiplied by 24,000 multiplied by 1,200, divided by 3), which is the square root of 19,200,000, which is about 4,381 units. That means roughly 5.5 POs a year, or one every two months. Average cycle stock is EOQ divided by 2, so about 2,191 units. Annual holding cost is 2,191 multiplied by $3, about $6,573. Annual ordering cost is 5.48 multiplied by $1,200, about $6,576. Total minimized cost is about $13,149 a year. The intuition: at EOQ, annual ordering cost roughly equals annual holding cost. That balance point is what the formula is solving for.

Common triggers

• You are negotiating with a factory on MOQ and need a defensible target order size, not just 'whatever they will accept.'
• Your 3PL bill is climbing and you suspect you are over-ordering relative to your demand. Cycle-stock math will show it.
• You are planning Q3 and Q4 inventory buys and want to separate the EOQ base case from the seasonal override.
• Cash is tight and you are tempted to order half-loads. EOQ tells you the cost of that decision in ordering dollars.
• You are switching from one PO every quarter to one every month, or vice versa, and need to know which is cheaper before you commit.

The most common mistake

Treating EOQ as a policy instead of a diagnostic. The Wilson formula assumes constant demand, constant lead time, no MOQs, no container fills, fixed S and H, no stockout cost, and one SKU at a time. All seven of those assumptions break in real DTC. If your factory MOQ is 6,000 and EOQ says 4,400, you order 6,000. If a 40-foot container fills at 5,500, you fill the container. If Q4 demand is three times Q1, you do not order the same 4,400 in February that you order in October. The right way to use EOQ is to calculate the base case, then list the operator overrides (MOQ, container, seasonality, cash, 3PL tier penalties) and decide consciously which one is binding this PO cycle. A brand that orders to EOQ blindly will be short for Q4 and long for Q1, every year.

Browse the full ecommerce finance glossary for every metric and money term a DTC operator needs.

Frequently Asked Questions