30 Jan 13 Strategize to handle economics of offering the Cash-On-Delivery option to win in online industry

Recently my elder cousin who is not internet friendly made her first e-commerce purchase from a popular e-commerce portal (Flipkart). She was delighted by the cash-on-delivery (COD) option provided by them because she wouldn’t have to depend on her husband to order it for her. She could easily browse, select, order and pay. COD is a strategy that has helped e-commerce firms increase their market penetration and sell products to customers who are wary of online payments. With upto 70% of people opting for the COD mode of payment, it is the preferred mode of payment for most customers in India.

However, this policy has also created a lot of sticky situations for these players. They are finding it increasingly difficult to manage the economics of COD. Why is it so?

1. Well firstly, the cash has to be collected by the courier and takes a  minimum of about 2 weeks for the company to get the cash in hand
2. As the option involves handling cash the cost of delivery is higher (ranging from INR 40-45 (for a 100gm parcel)).This fee is not the prime cause of worry, as providers have to give a fee to accept card payments too. It is the returns for COD that create the actual havoc. For returns the courier charges another 40-45 to collect the parcel and deliver it, so approximately INR 80-90 are spent for a null order. This is in addition to the customer acquisition cost already been spent for the consumer to shop with the company, making total costs higher.
3. Research reveals that COD customers tend to have a higher product return rate than online payment consumers. One of the main reason for this may be because the customers’ feel that they have still have not ‘paid’ for their purchase and find it easier to change their minds about the purchase than the card payers who have already paid for their purchase.

To minimize the expenses incurred in offering COD and improve profitability in the longer run, companies will have to strategize. Those who can achieve this will gain an edge. I believe the following steps can help companies to manage the COD policy more effectively –

1. Prepaid-postpaid dilemma –Collecting, utilizing and analyzing data for users by geography (urban – semi urban-rural) will help identify areas where consumers are friendlier with online payments. Making an online payment (debit card/net-banking) should be made more lucrative than COD. Making it nominally cheaper or discounted will help initiate a reverse trend by making online payments more attractive.
2. Agent model for remote locations –For remote locations, formulate an agent model wherein all product deliveries can be made to a single centre by multiple online product companies. COD customers can pay in cash and collect their parcels from the center. This will help all the players to manage logistic costs of  COD especially for far flung locations.
3. Stricter return policies – Having a stricter return policy (time limit of a 30- 45 days, unused apparel, collecting valid reasons for returns etc.) helps the entire industry, but considering that the majority of orders in ecommerce are via COD, it will help to reduce the returns on this option as they tend to be expensive for the company and negatively impact the bottom line.

As a strategy, it is important for all players to offer the COD option as many customers are not comfortable with online payments. However companies will gain immensely if they are able to slowly encourage a shift to card payment mode and along with it, manage the economics of offering a COD option to customers. At least for urban areas, the customer should be encouraged to utilize online payment modes. This will be crucial for growth towards a more robust industry and providing great collection and services on portals.