It’s been a little over two years since I joined GO DESi, an FMCG start-up that sources its products from rural micro-entrepreneurs and markets them in the urban markets with a goal of taking you back to your roots. The learnings from working at a start-up has been exponential so far, so I thought I’d share another one of those lessons with you guys. You can read the first one here.
In my initial six months, we were selling in a few hundred retail stores in Bangalore, on Amazon and few other online platforms. But to achieve our next stage of growth, we decided to sell our products directly from our website — why give someone else a piece of our sales as commission, when we can have the whole cake to ourselves. So we got down to building a whole new website (we barely had a functioning blog up until now), set up the order management systems, signed up with a logistic partner to ship the packages and ran Facebook and Instagram ads to get people to try our products — thus began our e-commerce operations.
One of the pain points for an Indian business selling online is managing Return to Origin (RTO) shipments. But before we get into that, lets understand the root cause of this problem — the customer typically has 2 payment options, either they make an online payment upfront or pay “Cash on Delivery” aka COD, the latter is a hugely popular option in India. Like many Indians, my Mom would rather pay for something once she receives it, rather than pay for it upfront online and “trust” that it gets delivered. Whilst it might be a boon to the customer, it’s a pain for the seller. The rest of the article will take you through the steps we took to get our returns down by half.
Let’s take a look at the difference in return rates between COD and Prepaid orders. Based on our data, there’s a huge gulf between the two and this impacted our margins significantly, hence began our quest to lower our returns rates:
- 1 in every 4 COD orders is returned back to us.
- Whereas for a prepaid order, its 1 in every 100 orders that’s RTO (Returned to Origin)
Despite having an internal Non-Delivery Report (NDR) management SOP, our data shows that the main recurring reasons why a package is returned is:
The reason why COD and returns are a huge burden to a business is because:
- For each COD order, logistic partners typically charge Rs. 50 or 2% of invoice value to handle the cash paid by the customer.
- For every RTO, the seller needs to bear the burden of forward + return shipping costs. For example:
- Cash flows get delayed — Once a COD shipment is delivered, the logistic partner can take 7–14 days to remit the cash collected to the bank account.
- Additional resources required to check with the customers when there’s a failed delivery attempt.
- On average there’s a 2.5x difference in the margins that we make for Prepaid vs COD orders.
To lower our COD return rates, we implemented the following practices:
- IVR Call / SMS verification once a COD order is placed, so we are sure that the customer who placed the order wants the order. You can find one on the Shopify app store.
- Incomplete shipping address is a huge problem — we were spending a lot time manually reviewing each order for its address quality. Then we integrated Thirdwatch on Shopify, this helped automate and quicken the order screening process to reduce the likelihood of RTO by identifying cases of incomplete addresses, if the same customer placed another order shortly after the initial one — happens when you discover a discount code.
- Finding the right combination of logistic partners — This one took a long time to get it right. Each logistic partner we worked with has their own strengths and weaknesses. Some better or worse than others — you won’t know about it until you actually try it. But some key attributes you can look at is:
- Pricing — this is crucial in determining what margins you’ll make, but don’t always go for the cheapest option — read some reviews and see if you can get some references from existing e-commerce businesses.
- Service quality — is the courier adhering to the promised SLAs, overall RTO%, are some cities causing unusually high RTOs, are there many scenarios where there are fake remarks in the event of an unsuccessful delivery.
- Responsiveness to solving issues — we spent a lot of time going back and forth with one of our courier partners in trying to resolve our disputed weights (when they charge us for a higher weight than actually possible).
- COD Remittance cycles — the sooner you get the money, the better your cash flow. Check on how long it’ll take for the money to get remitted once a COD order is delivered.
Using a shipping aggregator like Vamaship or ShipRocket can better help find the right combination of logistic partners more quickly as they have contracts with multiple courier partners, you can switch with a click of the button. We’re using Vamaship now and are happy with their service.
- Being on top of the shipping partners is critical, having regular calls with them to discuss issues and understand the ground level scenarios — especially given the impact of lockdowns might have on the transit times for packages.
- Based on past data, we built a prediction model to estimate our likely RTO% on a week by week basis — Initially, it would take 4–5 weeks for a package to return back to us, so the time lag was immense in understanding the RTO% and take steps to mitigate the high return %, so this now helps us in being more proactive in taking decisive actions.
- We analysed on a city-wise and pin code level to identify high COD% cities, high RTO% locations so we can either switch logistic partners in those areas or black-list the pin code. We also created specific ads in high COD cities to promote online payments.
A MoM comparison of the COD vs Prepaid % for the Top 10 cities. We flagged Kolkata for having high COD%, despite being a Metro.
- One of the simplest yet difficult things we could do was to convince more people to simply make an online payment rather than choose COD. Given that we’re a start-up, we made changes to product pages to build trust, so the customer feels at ease to make an online payment and added a dis-incentive for a customer who might want to choose the “Cash on Delivery” shipping option during checkout by levying a Rs. 30 fee.
These changes resulted in our RTO going down to single digits, and Prepaid order surpassing COD orders for the first time in Feb — this helped achieve our highest margins yet with COD enabled. The graph below shows the correlation between lowering COD% and its impact on RTO%.
In April and May, we disabled COD entirely (due to COVID) and had a return rate of just 0.75%. But disabling COD altogether might alienate some customers who would otherwise make the purchase. We also noticed a drop in our conversions by 2–3%. So we restarted our COD just a week ago and since then the order ratio of Prepaid : COD is 65:35, our highest split ever.
If COD is a necessary evil, then the above steps can be implemented to get the return rate down to 7–8%. A caveat here is that we operate in the food space, the returns will vary from category to category i.e. fashion has some of the highest returns rates across all categories.
If you have some other tips/suggestions on lowering the return %, please leave a comment below, would love to hear them.
