How Cash On Delivery (COD) continues to be a pain point for e-commerce players

COD (Cash on Delivery) is an ecommerce payment option, where the buyer pays for the product at the time of delivery, and not when placing the order. This means that the customer does not need to own a credit or debit card, and in the scenario that the product is not delivered, he does not have to go through a dispute process to get back his money.

COD was introduced by Flipkart, back in 2010. While that was an amazing step to bring new customers to the ecommerce platform, it brought along its own set of issues which bleeds ecommerce companies to this day. In fact, a lot of ecommerce companies would turn profitable if this delivery option did not have its share of problems.

While very successful in early days, the RTO (Return to Origin) rates of packages shipped using the cash on delivery option have gone up to nearly 35% of all orders. This increases the cost of the ecommerce business on multiple fronts:

• The largest cost is the cost of customer acquisition. Typically, ecommerce businesses spend anywhere between Rs.100 to Rs.500 per order to acquire and retain customers. This cost now gets loaded on the approximate 2/3rd of the paid orders, which effectively increases the acquisition cost by 50%
• The next is the cost of logistics. For small packages, it can typically cost up to Rs.80 to carry a package to a customers doorstep. When a customer refuses delivery, it costs another Rs.80 to carry it back. That’s Rs.160 spent for zero revenue.
• The third is the cost of packaging and handling. Each order incurs a cost in handling and packaging material. When returned, there is again a cost to unpack and check and restock the product.
• The final cost is the cost of transit damages. Some products that travel across the country and travel back may come back in damaged or unsalable condition.

Issues with COD started when buyers started using this option for other totally unintended options including:

• Buyers indulge in “online window shopping”, except here the window travels to his location and he gets to change his mind. Customer can do this as there is no commitment to take delivery of the COD order and the cost of taking the product to the customers' doorstep and back is the sellers' cost.
• Buyers order the same product on multiple sites. The one who reaches the customers' doorstep first gets his item delivered, all the others that follow are refused and returned.
• And then there are a set of customers who place orders with no intention of taking delivery.

Let us now understand the issues with COD deliveries on the logistics end:

Insufficient address: When the address is incomplete, the delivery boy has to make multiple calls to the customer to locate the address. This creates another issue, if the customer is unable to receive the call when the delivery boy is in his area, the package will get returned. A lot of COD orders have incomplete or insufficient addresses, making this a big issue. Prepaid customers, on the other hand, are more committed to the order and enter detailed addresses.

Overloaded FE (Field Executive)

To make deliveries cost effective, logistics companies allocate the maximum possible packages to each delivery boy (FE) with route optimization. However, in practical purposes, this doesn’t work, as the FE loses a lot of time at some customers, who may not be available, who do not have cash ready, or who ask for delivery at a later and specific time (for eg. Come back at 4 pm tomorrow). In most cases, the address may not be on the FEs route at that requested time. In such cases, the FE’s ask customers to cancel their order and order again. In many cases, the FE cancels the orders on his app when a customer makes a request he won’t be able to handle, or if the customer doesn’t pick up his phone.

The above issues do not occur with prepaid orders, as in that case, the package can be delivered to any family member available at the address without having to coordinate cash collection.

Several E-Commerce players have now started blacklisting customers who refuse COD deliveries and blocking them for future purchases.

In conclusion, COD has radically changed consumer behaviour and brought millions of new customers into the ecommerce ecosystem, however, it remains a big pain point for every online seller. Getting COD customers more committed to receiving their orders will play a big role in improving unit economics of E-Commerce businesses.

By Alok Chawla, Co-Founder, Gizmobaba.com