Published by MBA Skool Team, Published on April 07, 2011
Cash on Delivery (COD) model is not a new concept. It’s a very old method of buying. Whenever the sales are not over the counter (OTC), COD was the most preferred mode. COD is a mode of payment in which a payment is made when the actual delivery of goods happen and the point of delivery. If the purchaser does not make payment when the good is delivered, then the good will is returned to the seller.
A very basic example of COD is when you order food from a nearby restaurant over phone. The delivery boy comes and hands over the food packet to you expecting immediate payment. You make the payment and transaction is complete. Similarly Dominos Pizza also follows COD in most of the countries.
The same concept can be extended to the time when you buy something online. A person goes to the website, selects the product, checks out it in the shopping cart and orders it. The company delivers it and the cash is paid on delivery.
Over recent years, the above process was changed to advance payment mode. The buyer needs to first make a payment through his credit/debit card or online accounts, and then only the order would be fulfilled by the company. This was very important for the company as it cuts the risk in their logistics. Many a times, fake callers or users place a lot of orders using COD mode but then when the delivery is made, it turns out to be waste as the buyer was fake. This increased the logistics and transportation costs of the companies.
COD was becoming obsolete but it has been reviving off late. Reasons?
People still don’t trust the online payments entirely. Especially in countries like India, China where market is huge but infrastructural lapses are there. People have apprehension while making online payments fearing fraud from the company, payment failures, wrong product delivery, and problems if failure happens. Also many people are unable to buy online in countries like India as they don’t have online accounts or credit cards. So they any day prefer a mode in which they can actually see and touch the product before they make the payment in cash.
These all reasons have lead to revival of COD.
Many companies are using it to differentiate themselves from others. Many companies like MakyMyTrip, Flipkart, Rediff etc are switching to COD mode and already spikes in sales are evident.
But there is other side of the story too. The things look very good and simple when thought from financial or customer perspective. But when you think from Operational or Logistics perspective, it gets complex.
COD makes a lot of sense if the transportation and logistics is handled by the selling company (or say the website). So the delivery boy collects the cash and gets back to the company after delivering the product.
But the business doesn’t work that way. All companies can’t afford or are not interested in maintaining their own fleet. They hire companies like DHL, FedEx, Gati, Blue Dart etc to do the delivery for them. Now if the payment is COD so the third party has to collect the cash on the actual company’s behalf. This means that now this cash has to be given back to them (may not be physically, online transfer will do). It adds to the process. Both companies have to track this cash and make sure that the cash is delivered.
Reverse Logistics become much more important as the COD option gives the user an option to turn down the transaction by refusing to buy. A user can also be fake so the logistics department or company has to take the product back to where it came from or maintain an extra inventory waiting for re-order of the same product. This doesn’t make life any easier.
The Cash on delivery model is both advantageous and disadvantageous at the same time. The best method of payment in online sales in inarguably Online through credit/debit cards but many a times things don’t work the way they should. Cash on delivery is a tradeoff between customer’s and your own ease of use. Many companies (mainly Indian) are reverting to COD mode. Will it be beneficial in the long run or they will end up spoiling the customer habits? Let’s wait and watch.
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