I have been reading the horror stories about how the cash-on-delivery model of payment touted by the e-commerce companies in India is the root of all their troubles and may ultimately lead to their ruin. It is almost funny how one of the most innovative ideas of our time is getting blamed for the things it is not really responsible for.
I would say cash-on-delivery is actually one of the best things that has happened in e-commerce, or for that matter, any form of commerce. Here is why.
I just flipped through the 2011 balance sheet of Jubilant FoodWorks Ltd, the publicly-listed company that operates Domino’s Pizza India Ltd, and was amazed to note some jaw dropping statistics. This company shipped about 3.7 crore pizzas in the year, equalling to 1 lakh pizzas sold per day. The pizzas sold for a total of Rs 600 crore, translating into an average price of Rs 162 per pizza. The business operated via 380 stores in 90 cities; that is, approximately four stores per city. Each store sold approximately 1 lakh pizzas a year or about 300 pizzas a day. That’s about 25 pizzas an hour. The company recorded a net profit of Rs 90 crore. This equals to Rs 25 per pizza or a 15 per cent margin on the sale price.
I think this is awesome, considering that this business is entirely managed as a cash-on-delivery business. Also, if you review the size and scale of the operations they have, it resembles any gigantic e-commerce business. So how can anyone blame cash on delivery as the culprit that ruined a business?
Cash on delivery must be examined as a business opportunity rather than a titanic blunder. There are very few businesses in the world that actually invite brands and companies within the sacred portals of their homes. Leveraging what is not easy but can be highly profitable. So, if you want to master the cash-on-delivery model for your business, then maybe you should start by getting onto a pizza diet.
In my view, the delivery model of Domino’s Pizza can teach five important lessons to those who intend to execute the cash-on-delivery business model.
1 Cash is guaranteed when collected from home
No one can run away from home. There is a Marwari saying, “If you run away with my money, I will come to your house to collect it.” Imagine, people giving you their home addresses to deliver and collect money. Can you get any more upfront? I doubt if anyone would like to rescind on a pre-placed order and kick up a fight in front of their neighbours over a small amount.
Lesson: getting called home is an assurance of getting paid. Leverage it.
2 Personal sales provide the best reference check
In the weary world of business, people are unreliable. Companies are even worse. Who can fight a big legal battle with corporations whose karma has clogged up the Mithi river (a river in Mumbai that infamously gets clogged and causes floods)?
Now, cash-on-delivery is a full-proof method of establishing creditworthiness. Once your name and home address is in the system, the seller quickly establishes if you have ever defaulted on your payment. If you have played truant, then you will not be supplied the pizza or the shoe you ordered. That’s too bad because it’s not easy to change your name or the place you live in at the drop of a hat.
Lesson: use cash on delivery as a means to establish creditworthiness. And when the market is ready, cross-sell that creditworthiness across business verticals so that it becomes a win-win.
3 Use cash on delivery to check ‘intent’
Consider the pizza sales again. If 3.7 crore pizzas were sold just by one company, it’s very generous to say that at least 2 crore unique households in India bought a pizza (2 million x 2 pizzas = 4 crore pizzas a year).
Now, those who buy pizza in India are typically e-shoppers. The numbers state that e-shoppers represent about 1 crore in India. And this is the same affluent, upwardly mobile community that can afford pizzas and printers delivered at their doorstep. So while none of these households return a pizza that has been ordered, why do a staggering 45 per cent (according to a recent media report) of the same set of households refuse to take delivery of online goods purchased, when the courier reaches them? If you do not return one out of two pizzas you buy, why would you return one out of two books you have e-ordered?
Lesson: new businesses using the cash-on-delivery model may want to collect small token amounts in advance to check ‘the intent’ of these happy-to-reject customers to ensure they pay up.
4 The 30-minute curfew works for pizzas, not for books
If I am hungry and want to eat, it makes sense to promise me a pizza in 30 minutes or a free pizza if the deadline is not met. But I ask, what is the urgency to ship a book with the same demonic speed while executing a book delivery? Will it matter if the book reaches me in a few days and not minutes? And hey, if I am so ‘hungry’ to read my newly ordered book, then ask me to pay double the regular charges for ‘instant’ delivery!
Lesson: new businesses relying on cash-on-delivery need to step back and ask themselves if they can spend less money on speedy delivery.
5 Cross-sell and cross-sell like crazy
I am sure at one time or the other, we have indulged ourselves with those sinful garlic bread sticks and dipped them in that irresistible co-conspirator, the ‘cheesy dip’ that comes along. Coke and pizza get along famously and hence ordering a bottle of coke is logical when you order a pizza.
Another example. Haven’t we all seen those mini shampoo and moisturiser sachets embedded in women’s magazines? Or that perfume strip we carefully peel off and inhale as if it was pure ozone? The point is that with every package delivered to someone’s house, there is a great opportunity to cross-sell domestic products, which the same set of consumers could be encouraged and let me add, delighted to sample.
In the case of e-commerce companies, this is not a goldmine kind of opportunity; it’s a veritable diamond mine. Cross-selling and delivering samples do not cost anything extra in deliveries (the same courier boy achieves both jobs); rather it can easily change the fortunes of the fledgling e-commerce companies who say they lose money when they execute cash on delivery!
Given the myriad kinds of goods e-commerce companies ship out (books, electronics and home appliances), even a failed direct marketing student can build a simple ‘ASL’ or age–sex–location business model offering outside brands to ride on the e-commerce deliveries headed to consumers.
For example, if a microwave is headed for Ms Sharma in Noida, the package can surely contain packs of free popcorn and ready-to-drink soups sponsored by other brands that would happily pay to reach their target audience directly. Let me add, Ms Sharma will bless you.
This is why desserts and appetisers bundled with pizza deliveries work so well.
Lesson: allow partner brands to piggyback on the cash-on-delivery transaction. Extract money from them for home delivering to their target audiences. Even cross-sell that extra as a surprise for the buyers.
CEO & Co-founder, Games2win
The author blogs at therodinhoods.com