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Why Cash on delivery would put the brakes on the Indian e-commerce story

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.

COD

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?

About Dr Vikram Venkateswaran

Dr Vikram Venkateswaran is a marketing professional with almost 10 years of experience. He can be followed on twitter @drvikram. He also blogs at Desi Brand Strategy

13 comments

  1. Clinton Goveas

    CoD is only feasible for the bigger players who can bleed their investor’s money to try and capture the market in the medium term.

  2. DR VIKRAM VENKATESWARAM, it seems you have improper knowledge of Indian ecommerce First thing, payments are not credited immediately, it takes around 4-5 days to be credited through payment gateway in the vendors bank a/c Second thing, one of the main issues that you have not stated is the returns on COD which is around 30% for fashion sales websites and 10% for the rest which is a real big loss. Now this is the main problem Indian ecommerce wants to tackle, negative capital and all does not work in India man, they do not have any worry for the capital. None of the above solutions can work in India and there are solid reasons for it.

  3. Bangalore Withlove

    classic… bangalorewithlove.com

  4. I order loads of stuff online using my CC. The last 20K phone i ordered, haven’t received it and its been 25 days. Customer Service dont know anything. I think they are delaying things for purpose. Just lost trust and would go for COD next time. CC sharing is based on trust and if the sites dont keep their promises, it wont take time to go away. 80% COD may become 95-100% COD and that will continue to hit margin.

  5. As business having no cash flow issues I encourage my customers to use COD by giving them a discount, which saves me paying 6% to the payment gateways. I dont understand the concept of preventing customers from choosing what they like and forcing them to choose a payment which they are not entirely satisfied with.

    • Rahul, I should correct you, payment gateways charges are nearly 3% or less depending on volume. Now your idea is business specific, you cannot import the same to all businesses where people dont accept orders when it reaches their place even though they have confirmed the order. Saving charges also is business specific, since if I am sending Rs.100 thing by courier, I dont want to save Rs.3 by letting him order through COD since logistics charges around Rs.30-40 extra on COD.

  6. the site called timtara.com is doing the same thing as attracting money with heavy discount and not shipping product for days and issuing refund after months can’t we complain about that kind of frauds

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