My brother has become an online shopping fanatic. He uses his android based smart phone to shop online. His shopping lists include shoes, phones, t shirts, CDs, MPs players etc. but the interesting part is that he does not pay on line but instead uses the cash on delivery module. While this has led to the boom in e-commerce in India, it is not necessarily sustainable in the long run. As a matter of fact this might spell doom for the vendors in the long run. Let me explain why.
E-commerce works on the principle of negative working capital. In other words the vendor does not use his capital in procuring the goods rather uses your payments made in advance to procure the goods and deliver it. Let me take an example, just imagine you bought an iPad on line, and you paid for it using your credit card. Now the money from the credit card is debited immediately while the delivery of the iPad takes about a week or 15 days. Now most firms can procure faster and deliver but they take that extra few days as they retain the payment and can put it to other use or simply generate interest for those few days. This model was pioneered by Dell when they sold their laptops extensively through Dell Direct and it had worked very well for them earlier.
Now this model is under threat as consumers in India work on the cash on delivery model. Now in the global scenario Cash on delivery accounts for almost 15% of transactions according to a Nielson report. But in India it is almost 80%.
Apart from locking up working capital, cash on delivery also adds to the complexity of the supply chain. Plus there is an added threat as collection is done by the delivery agents and often there is an element of hazard while using external collection agents.
Despite these challenges “Cash on Delivery” has led to the boom in the e-commerce in India and does not look like the model is going away soon. So what can e-tailers do to sustain themselves in this environment?
These are some of my thoughts..
1. Have cash on delivery (COD)only for select categories. Often using COD for all categories may not make logistical sense. Some of the categories like books etc may not need COD model. While electronics is something that COD model would work better.
2. Keep a minimum purchase limit for availing COD. Now I have had many experiences on setting limits and not too many people in India have been very happy with it. But in the US and western Europe there have often been limits on setting OD facilities.
3. Start a small charge for COD, maybe a tiny amount to begin with but sooner or later the charge could potentially off set the working capital deficit.
Now these are some of my ideas and as always I welcome you to write back your feedback. Is the current e-commerce model sustainable? If yes then why?
And if not then what has to be done to sustain it over longer periods of time?