Payments systems (or lack of them) are a very big problem for India e-commerce and as much as COD is being touted as the panacea to get over the hurdles of reach and consumer trust, I am just not able to buy the story. To me it seems like optimizations to COD are like trying to make the horse run faster while what we need is an automobile (sorry Henry Ford!). Stretching the analogy, we not only need the automobile, we also need the support infrastructure of petrol bunks, repair shops, credit agencies etc. The equivalent of the automobiles in payments are well penetrated and reliable electronic payment systems, which in turn require good credit rating agencies, trust worthy law enforcement etc. A very tall order to achieve in a few years when there is generally low trust, low penetration and insipid growth if any (credit card penetration is stuck at 20M for last few years) of electronic payment systems.
I am firmly in the camp of people who believe that the e-commerce bubble is going to burst soon and while I think there are many fundamental reasons why this will happen, if you forced me to pick only one I would pick lack of electronic payment systems in India.
Before I explain any further, let me state two key assumptions:
- I am primarily talking about COD in the context of high volume, low gross margin (<Rs1000) products
- I am assuming that mid-term profitability is important
If both these assumptions don’t apply to a business then you can ignore my analysis.
Sources of Fixed Cost in COD
I explained the LTV impact of COD in a previous post. Let me expand on this further and list down the sources of fixed cost per collection:
- Cost of physically traveling to collect money: Number of trips that need to be made to collect the money and the cost of these trips especially given high petrol prices
- Cost of consumer changing their mind: If the money is not charged immediately when the consumer is in the buying window, large % will change their mind when the order is delivered (anecdotally I have heard 30% “return” rates being quoted in the industry today)
- Cost of managing cash and reconciliation: This requires people based processes to count, store and deposit money in the bank in addition to manually reconciling the money with the right order
- Fraud: This has many sources, including the collections person running away with the money, fake currency notes, collusion between the collections team, law enforcement issues with someone carrying significant cash etc.
- Hiring, re-hiring, training and management of the collections team. This will be a huge fixed cost borne by the company
All of these translate to a FIXED COST PER TRANACTION, regardless of the money being transacted. Just this fact can make the business unprofitable unless, and this is important, that the cost of collection can be completely “variabalized”. There is no other way to do this except to switch to a completely electronic payment system.
Scalability challenges
And finally, there is the scale challenge. If the GMV value (not revenues – and can we please stop calling GMV revenues, it discredits everyone in the startup eco-system!) of e-commerce transactions in India is to reach $1B annually (so ~$100M in revenues) and the average GMV value is $20 then we need 50M transactions – even if 60% of these are based on COD, it means 30M transactions of $20 at a time being handled and reconciled by people. Let me say it again, for $100M in revenues there will be 30M POPLE-BASED transactions to collect and reconcile the money. There will be management layers to manage the team, hiring and retention (and replacement will be an issue) as the company will require low-skilled workers to try and make the math work. A rudimentary calculation assuming 6 collections per person per day means that the front-end collections team will have to be of about 15,000 people and probably half the size of this team to do the backend operations. Most of the front end team will probably earn Rs5-7K/month. To keep a reliable force out in the field (not in a factory where it is easier to manage a team) there will be significant management overhead and constantly having a pipeline of 10-20X the team strength (i.e. 150K-300K people) for replacements. Then there are the costs of career planning and growth for this work force.
It just is really hard to see how this will work when transactions gross margins are low and nothing that I have heard or seen in the last 9 months of this bubble is able to convince me otherwise. The COD payments business is a services business and in order for the math to work, it needs to quickly transform to a products business, i.e. be replaced by an electronic payments system. That will take a lot of time. A.Lot.Of.Time.
Well frankly, I don’t think the numbers quoted are anecdotal to the industry. Returns of 30% were prevalent 5 years ago. The number has come down sharply to about half of that over the past year to 18 months.
Delivering 6 packages a day – again, I think the industry average is more like 9 with many players who’ve set up their own logistics chain taking it up to 15 – 20 deliveries a day….That sure would change a lot in the analysis above.
What’s even more encouraging is that the cost of delivery (considering courier collections charges, 15 – 30 days lag in the courier company depositing money into the company’s account, necessary working capital financing to tide over this etc.) actually decreases by about 40% if the Company uses it’s own logistics chain. So let’s rework the numbers sir….
The COD charges can be made variable by charging a percentage value as service charges in case the consumer chooses COD as a payment option
hi dhiraj
Great feedbak and appreciate the valuable inputs. The business in which i am we sell spectacle lens and contact lenses online. Our major hurdle is that servicing a niche in the ecommerce market we are already confining our customer base and with the low penetration rates in the e payment market we were forced to add cod. We are just two weeks operational but we guess cod will be easier process to handle as our logistics partner is our collection arm too.we are serously thinking of advising the logistics partners to carry wireles edc machines so that cash handling is not too difficult. Thank you
Two things:
1) from an e-commerce company point of view, it is expensive if there is a tangible shipment is involved. You not only have to the pay the guys who collect the money for you but also for the shipment. So as it is said, if the ticket size is less than 1000/-, becomes tricky to ask the customer to take the charges for it.
2) For a COD companies, if they depend only on e-commerce they are going to be history very soon. They need to integrate themselves with whole lot of business where there is cash collection involved, like job, matrimony portals, insurances etc etc. This not only gives the best capacity utilization but also gives them clean case for scalability. And they should strictly stay away from being just an another logistics company.
Hi I am new visitor and I liked your article a great deal. I guess rejection rates can be lowered if the electronic payer is rewarded some extra savings vis a vis COD . One main reason for opting for COD is it does not require consumer to give all the details and stuff.
A lot of ecom sites do not allow gift coupons or discounts to be used when payment mode is chosen as COD. That ways, they can tout they allow CoD as a payment mode while giving more discounts on prepaid modes. Another variant of CoD is CBD – Cash before delivery which is also catching up…
COD is a reality for business to scale. The issue is to keep it under control. Its an equivalent to say issuing an unsecured loan. You need to know if the customer is good or bad. I feel an equivalent of CIBIL should emerge amongst e com companies, they should share data on erring customers based on acceptance record. The customer will be tracked on email and mobile combination (customer can use somebody else’s email and mobile if he has low CIBIL equivalent score but will be cumbersome). This will deter customer from non acceptance.
The challenge is to make system more efficient rather than not using it