A recent article in Economic Times points to the problems faced by online players in delivering their goods and services on cash-on-delivery (CoD) basis.
I cringe everyitme I read such an article. Since 2007, there’s an all-too-common narrative about the cash-on-delivery model in online retail. CoD is considered a necessary evil. The tail that wags the dog.
Flipkart popularized CoD in India recognizing that, like many other developing countries with fluid systems, poor infrastructure, and lax regulations, India is a low-trust economy. In such a scenario, to incentivize people to buy online, it makes complete business sense to give cusotmers an option to pay after the goods are delivered to them (and they can verify quality).
Metadata from various research sources suggests that 50 – 60% of total ordersfor all e-commerce companies in India are CoD orders. To put it in perspective, as per the current gross merchandize value (GMV) for top three e-commerce players in India – Flipkart, Snapdeal, and Amazon – goods worth $5 – $6 billion could be delivered through the COD channel this year alone by these companies.
Customers love CoD. But does it make operational sense? Many industry experts claim that CoD causes accounting complexities, working capital planning issues, and logistics nightmare for companies. Another problem that is highlighted with CoD orders is that such orders are vulnerable to customer rejects at the time of delivery, leading to two-way logistics cost for companies. As per an industry estimate, customers cancel 12-15% of CoD orders. Bharath Devanathan, COO Groupon India, says CoD is not the right way for ecommerce – “It reflects lack of trust on companies.”
Although these arguments have merit, they confuse the size of the problem with the severity of the problem. Alok Kejriwal wrote an insightful piece in Business Standard about what’s wrong with the CoD narrative, but he too fails to fully explore the fallacy in the argument.
In my experience of observing the e-commerce space, and now the hyper-local delivery space, as a participant, investor, and growth coach, discussions about CoD miss a fundamental point. If you look at the business logic,
COD costs are set off by the payment gateway charges for prepaid transactions (the next best alternative)
Yes, COD does suffer from higher ‘rejects’ but then payment gateway leads to invalid orders, which is again a loss of sales
Cash redemption cycle for any e-commerce company typically is: t+a, t+b, t+c, where ‘t’ is the transaction date, ‘a’ is CoD, ‘b’ is payment gateway, and ‘c’ is 3rd party logistics CoD, and where ‘a < b < c.’
Lastly, there are ways such as factoring to reduce working capital requirement without reducing the working capital cycle.
India had 40 million online shoppers in 2014, which is set to grow to 65 million in 2015 and, according to a report by Google and Forrester, to 100 million by 2016. With the credit card penetration still at 23 million and mobile wallets at their nascent stage of adoption, Investors and entrepreneurs would do well to direct their attention toward capturing this customer base rather than to concern themselves with problems related to CoD.