Cash-on-Delivery Returns Can Be Zero – It’s Possible

Hey Friends, thanks for paying attention to my blog.  This post is targeted at people in e-Commerce industry.  I hope you will find this interesting.  Please do not hesitate to put in your comments and ideas.  It’s always nice to share knowledge.

Let’s start by understanding the complexity of problem and it’s magnitude.  If its a repetition for you, please feel free to scroll down to the solution I am proposing to make COD returns ~ zero.

Cash-on-Delivery – Indian e-Tailers’ favorite mode of transaction has become probably one of their biggest nightmare too.  Why?  Here are some reasons:

PS: Don’t lock yourself to numbers below.  They are broad estimates only.

1. The biggest scare of all – COD returns – customers change mind and refuse to take delivery of a COD order.  Approximately 60% online orders are COD orders in India and COD return rate in India is estimated between 40% – 70%  depending upon whether you are a marketplace or a direct e-tailer; who your customers are; how fast you were able process order & reach their doors; and the category of products you deal in (apparel being highest).  So say for worst example sake only – 600 of 1000 orders are COD and out of 600 COD orders, 420 (70%) COD orders are likely to return back in worst case during normal times.
2. COD Abuse – customers, especially during festive sales/sweepstakes, place multiple orders to lock inventory so that they do not loose out on a deal.   Remember all the nice pairs of shoes you ordered last Diwali but never bought?  Or all those lovely shirts? Estimates suggest that for every one piece of a product that customer desires, it ends up placing 4 COD orders in the same marketplace (impulsively to hook on to deals) and 3 orders on various marketplaces (anxiously to ensure it gets delivery from at-least one of them).  This represents about 85% COD returns during seasonal sale.  So as per our example, 510 (85%) of 600 COD orders will never be paid during seasonal sale.
3. COD Fakes – nowadays students, hackers and even competitors inject tens to thousands of fake orders into online stores for sake of fun (or whatever else they intend to).  These orders are never paid on delivery.  I have heard cases of thousands of fake orders being injected almost every week into at-least 2 popular marketplaces in India.  When I say heard, I mean from their employees who are known to me professionally or personally. 100% COD returns.  We cannot map this to our example figures – has to be dealt as special case.
4. Only Cash COD – So far no online store tells a customer during checkout if a card can be accepted on time of delivery.  They can’t because they don’t know if the delivery boy will be carrying a swipe machine or not.  Therefore, even if customer intends to pay, COD order returns for inability to accept card.  Estimates suggest that 30% of COD bounces are due to inability to process card (unavailability of cash).  So during normal times, of 420 orders likely to return, 126 orders will be return for cash-only restriction.
5. There are other COD issues which have trivial impact individually but collectively add a lot to operational overhead – Roaming People, Parents Not Available, Working People, Gated Communities, Army Cantonments, Open Delivery (pay only after opening the packet) etc.  They represent about 11% of the total COD returns.  So for our example, 46 of 420 orders will return for other reasons.
6. Marketing Loss – Today online business run on principal of customer acquisition.  Majority of retailers consider first transaction as a customer acquisition.  Therefore all digital marketing efforts are geared to get the first transaction – 60% of which is likely to be COD order.  On an average one acquisition costs INR 1,250 today if everthing other variable is fixed.  For 1000 acquistions, you spend INR 12,50,000 – out of this investment – 40%-70% of 60% (about INR 3,00,00 to INR 5,25,000) is at risk both in terms of revenue generation and customer acquisition.  After 30 days, when dust settles, marketing manager will get a campaign efficiency of about 50% only i.e. if you spend INR 12,50,000 in acquisition, you get only INR ~ 6,25,000 worth with an open COD ordering system.  What a shame 🙂

So how does it impact an e-tailer selling on it’s own online store or a vendor selling on marketplaces like Flipkart, Snapdeal or Amazon?

1. Direct e-Tailer ends up paying both onward and return shipping fee for every COD return.  Marketplace Sellers also pay both way shipping now – Earlier Flipkart, Snapdeal etc. used to take a hit on reverse logistics but now they pass on the cost to seller ‘if reason of return is not attributable to customer or marketplace‘ – this is not as black & white as it may sound to be a clause.
   
2. Waste of time and money in order processing and product packaging.
3. Carry a risk of damaging product or loosing it all-together in transit.
4. Invest millions in inventory that travels across country purposelessly.
5. For every order, stock at-least 3 times the inventory to be able to capture opportunity and avoid cancellations or be stocked out during peak season.
6. If you are a marketplace seller, it is highly possible that you get order for same item from same customer at the same time from multiple marketplaces.  That’s a disaster, because you have 1 piece in stock – sold multiple times at the same time.  (Trust me, Unicommerce or any other multi-channel retail system is never real-time)
7. Process all COD returns, open packets, re-process (and may be repack) and re-stock.
8. Majority of COD returns circle back in 30-45 days due to clogged courier services.  Therefore by the time product is re-stocked, retailer looses the opportunity of selling it all.

So what is the solution?  How can we make COD returns zero?

Here are few disclaimers so that you do not reject my proposal outright:

• I am not proposing to stop COD business.  It is a great business model provided it is done rationally in a way that creates win-win for retailer as well as customer.
• I have been one of the sellers in the marketplaces – so my proposal is based on real experience and pain of a seller.  I know what marketplace sellers go through in ops and how they a treated by marketplaces.
• I have also been a direct e-tailer, having invested in my own retail startups, brought them to a reasonable scale from whatever my means permitted.  So my proposals are based on real experience.
• I have implemented and tested my proposal in real life.  It is a validated proposal – trust me – it works.  What you will loose out by trying my idea, is what anyways would never be yours.

Finally, the indecent proposal that can make your COD returns zero:

• For COD orders, ask for a nominal COD processing fee (most people do that already).  Say INR 30?
• For COD order, during checkout itself, make it mandatory to pay COD processing fee online.  So say an order is INR 1,000, COD fee is INR 30 – take INR 30 online and collect INR 1,000 on delivery.
• It’s easy to implement – once customer chooses COD – put relevant messaging and redirect customer to one of the existing payment gateway depending upon choice of payment method.  Your tech can easily put a logic to collect COD processing fee only if COD box is checked.
• After collecting COD processing fee online, say thanks to customer the usual way.  You don’t need to go through the process of SMS verification, phone verification, link verification, voice-prompt verification or IVRS verification.  Order is confirmed online and can be processed immediately.
• Fine tune COD processing fee to optimize your conversion with help of analytics and customer feedback.   In one of my ventures, we used to take 10% advance online and 90% on time of delivery.  We rarely received a customer complaint.  In another venture we took only INR 5 as COD processing fee which was non-refundable and paid to charity (you can set it off to Carbon Footprint cause or something else) – our customers appreciated our gesture.  The exact rule, figure and cause will depend on your category, business, exposure and customer profile.
• In my real-life implementations, the COD processing fee used to be non-refundable unless order was cancelled by seller or marketplace.  You can decide your own policy – it can be refundable too, or may be refundable to wallet?

Expected Impact

Every business decision has an associated risk and opportunity.  My proposal is an experience that I have shared with you.  Below are some risk and opportunities I saw.  I am eager to know your experiences or advanced thoughts.

Downsides, Risks & Mitigation

1. Your conversion may go down for a short while because customers will bounce off the checkout when they are asked to pay COD processing fee online.  Mitigate it by communicating your COD policy on catalog pages.  Set the expectations in advance so that funnel does not skew too much at the bottom.
2. Customers who do not have any means of online payment will not be able to order – well think like this – if I have access to Internet and if I know how to order online and I also appreciate the value of convenience, I am 99.9% likely to have at-least one mode of making a payment online.  For rest of 0.1%, the payment providers have launched intuitive ways to pay online like SMS/Mobile payments etc.  Those retailer who think that COD helps those who do not have means to pay online need to do a bit more research – this is a myth.  Those who do not have means to pay online do not value convenience too – so they are less likely to be online shoppers.
3. Customers do not like to pay online due to security risk – In my view customers associate risk more with value & trust-worthiness of the brand than with the checkout process.  First half (before interval  catalog, price, policy, presentation) of the shopping process is critical – the second half (post interval – checkout, registration, payments) is implicit function of first half.  I have ran checkouts (not payment pages) on unsecure ports (http only) for prolonged periods.  A/B testing have shown trivial impacts on funnel performance for lack of SSL on checkout pages.  If you are a non PCI-DSS merchant, you can live off a 100% unsecure checkout because card data will be captured on payment provider site which is secure.  If you are PCI-DSS merchant and are taking card details on your own site, you are probably not making anything substantial out of this process, but continue doing so, it  is good practice to be secure.
4. Your campaign ROI will dip in Analytics or advertising dashboards – because you are no longer accepting fake or casual COD orders.  Mitigate this risk by taking management into confidence.  This has to be a well calculated risk with all stakeholders keyed in.  You just eliminated fake numbers from MIS reports.
5. You may loose some customers – well what worth are those customers who don’t pay on delivery.  I put this in a risk category because there are several companies out there who report only their top-lines – for them this proposal is like a red-herring.  Anyways I leave mitigation of this risk to reader’s wisdom.
6. You may no longer be the favorite destination for COD customers – measure the quality of customer you loose and retain.  Compare the two and then take a call.

Opportunities and Benefits

1. Almost zero COD returns.  We got returns only in genuine cases, like customer not available, incomplete address, etc.  We used to resolve majority of them by proactive logistics monitoring without having to reverse the shipment.
2. Acquisition cost runs parallel to order stream.  You have 100% visibility of how much you are spending and what worth you are getting.
3. It is the psychological impact of the process which made our customers feel committed to their orders.  COD fee was never found important to most of them.
4. Our customers found our proposition a win-win.  We had 1 in 10,000 customers call or write to us that he did not like our COD ordering policy.  We won that too by some courtesy and affection.
5. You retain top end spectrum of clients; reduce calls from non-sense customers; your people will enjoy talking to customers (we called them clients with respect)
6. Marketing effects are long-term.   Gradually you will realize that the repeat order rate goes up.
7. If you are a marketplace, your sellers will value you more.  They will put premium inventory into the system.  They will process COD orders at the same priority as Pre-Paid orders.
8. You will get maximum bang for investment in stocks.
9. You can play with JIT inventory which you typically do not carry and would never want to get into COD stream for reasons like cost, slow movement etc.
10. No fake, casual or impulsive orders – it costs money for each order to be punched into system.
11. Healthy Cashflow – probably the biggest advantage.  With a reduced COD return rate, your payables and receivables will co-ordinate.  You will be a healthy business with a health flow of cash.  Gone will be days where your balance sheet will have more liabilities than assets.  You will be able to pay your marketing partners and suppliers on time.  You will less likely default and stay longer in business.

About Me

I am an entrepreneurial-spirited technologist who has managed multitude of business complexities by strategical implementation of technology in a career spanning over 20 years. I have worked in reputed online, software consulting, and startups in leadership positions.  A major portion of my career has been spent in e-Commerce industry.  I have worked in almost all departments of an e-Commerce enterprise.   I am also curator of a ‘best practice based’ high-performance hybrid marketplace technology which I give out to e-Commerce startups as a ready launchpad.

You can check my profile on LinkedIn : https://in.linkedin.com/in/akhildelhi

I will love to connect with you.