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Cash-On-Delivery: Obstacles and benefits

By Ahmed Ogundimu   Mordor Intelligence projects the Nigerian e-commerce Market to expand from an estimated value of USD 8.53 billion in 2024 to USD…

By Ahmed Ogundimu

 

Mordor Intelligence projects the Nigerian e-commerce Market to expand from an estimated value of USD 8.53 billion in 2024 to USD 14.92 billion by 2029. This growth represents a Compound Annual Growth Rate (CAGR) of 11.82% over the five-year forecast period of 2024 to 2029. Factors contributing to this substantial growth include higher internet access, increased smartphone ownership, and a growing middle-class population with more spending power.

In the Nigerian e-commerce market, various payment options, including Cash on Delivery (COD), mobile wallets, and bank transfers, are available for consumers. Of these payment options, Payment on Delivery or Cash on Delivery poses the most significant risk to large and small businesses in the industry. While COD has fostered payment flexibility and trust between small businesses selling online and shoppers, it has drawbacks. When I spoke to a few founders of now-defunct e-commerce businesses, they cited COD as a significant factor in their failure.

Why Cash on Delivery (COD)?

The e-commerce industry in Nigeria has experienced significant growth in recent years, with more consumers turning to online platforms for their shopping needs. However, one of the challenges that e-commerce businesses face in the country is the issue of trust and payment security. In light of this, the cash-on-delivery payment option has become a necessity for e-commerce businesses in Nigeria.

One of the primary reasons for the widespread adoption of cash-on-delivery payment is the low level of trust in online transactions. Many consumers in Nigeria are wary of making advance payments for goods due to concerns about fraud and the potential for non-delivery of items. Cash on Delivery provides a sense of security for customers, as they can inspect the goods before making payment, mitigating the risk of being defrauded.

Moreover, Nigeria has a significant unbanked population, with many individuals needing access to traditional banking services. This reality poses a challenge for e-commerce businesses that rely on electronic payment methods. By offering Cash on Delivery as a payment option, e-commerce companies can cater to a more extensive customer base and ensure that those without digital payment access can still participate in online shopping.

Furthermore, the cash-on-delivery payment option addresses the issue of failed online transactions. Cash on Delivery provides a solution for undelivered or returned items in a country with logistical challenges and unreliable postal services. Customers are only required to make payments once they have received their orders, reducing the likelihood of disputes and dissatisfaction with the e-commerce experience.

Drawbacks of Cash on Delivery

The cash-on-delivery payment option in e-commerce businesses in Nigeria has significant drawbacks, particularly for small businesses. In 2017, after running an e-commerce business and consulting for scores of small and medium-sized e-commerce businesses, I wrote about these drawbacks on my personal blog (GeekishNG).

Cash on Delivery can substantially increase operational costs due to the need for additional human resources to handle cash collection and reconciliation. This additional resource requirement can be particularly burdensome for small businesses with limited resources. It leaves businesses highly vulnerable to fraudulent orders and non-payment. Small companies may need more robust systems and resources to deal with COD orders effectively, leading to substantial financial losses.

Furthermore, COD can result in frequent delayed or failed deliveries, as customers may refuse to accept the delivery or be unavailable to make the payment at the time of delivery. Failed deliveries can significantly impact the cash flow and inventory management of small e-commerce businesses. On the flip side, not offering COD can erode trust and credibility in the e-commerce industry, as customers may be reluctant to make advance payments for fear of non-delivery. This situation can particularly affect small businesses trying to establish themselves in the market as it erodes their top and bottom lines.

Here is a simple analysis to illustrate how COD hurts e-commerce businesses:

BC Fashion sold a t-shirt for N2,200.00 online, with a profit margin of N200.00. It uses a third-party delivery company to deliver to customers. With the delivery fee of N500.00, the customer will pay a total of N2,700.00 upon receiving the t-shirt. However, the transaction took an unexpected turn when the customer, who had chosen the COD option, was unavailable or unwilling to complete the purchase upon delivery.

The day’s events unfolded: ABC Fashion spent N50 on a phone call to confirm the customer’s availability, N10 on the packaging material, and N500 on the dispatch rider’s delivery service. However, upon the rider’s arrival, the customer either wasn’t present or declined the purchase, forcing the return of the item and an additional N200 return fee, bringing the total delivery expense incurred by the business to N760—all without a sale. The reason is that the e-commerce business will pay the delivery company whether or not they make a successful delivery.

Though seemingly minor, this singular incident reflects a broader issue when scaled up. Considering the labor involved in processing the transaction, the cost of acquiring the customer, maintaining inventory, and potential liquidation costs if the product remains unsold, the financial burden becomes substantial.

 

Projecting this scenario across 20 similar transactions daily over a year illuminates a significant challenge for e-commerce entities in Nigeria. Such operational inefficiencies and financial losses, mainly attributed to the COD payment method, are increasingly recognized as crucial factors in the high failure rate of these businesses. This trend underscores the need to reevaluate payment strategies and customer engagement approaches in Nigeria’s e-commerce sector.

 

Making COD work through “Trust” and other mechanisms

In the dynamic world of e-commerce, the importance of building customer trust cannot be overstated, especially when navigating the complexities of payment options like Cash on Delivery. Trust is not just a feel-good factor but a crucial business strategy with tangible benefits.

How customer trust can help your business

From my vantage point of having extensive e-commerce experience in Nigeria and abroad, I have first-hand experience with how customer trust has shaped industries differently. Trust can significantly reduce payment uncertainties—customers committed to their purchases due to trust are less likely to cancel orders or reject deliveries. Additionally, trust can influence customers’ payment preferences in an industry where cash flow is king. In the US, for example, e-commerce businesses observe a positive trend where shoppers trust reputable brands with upfront payments, thus minimizing COD’s logistical and financial challenges. E-commerce businesses can build trust by providing an open communication channel for customers, resolving disputes between shoppers and sellers promptly and fairly, and selling quality items and representing them correctly on their e-commerce platforms (products look and work as advertised). Remember, these customers also buy on online marketplaces such as ASOS, SHEIN, and AliExpress abroad, and pay before their orders are shipped. Trust is key.

Other mechanisms for mitigating COD risks and failures

Below are some measures you can employ to minimize the risks of COD for your business:

Pre-Delivery Confirmation: Implement a robust system for confirming orders before dispatch. This mechanism can include automated confirmation messages or calls to ensure the customer is available and still interested in completing the purchase.

Partial Pre-Payment: Encourage or require a small deposit or partial pre-payment online. This solution confirms the buyer’s commitment and helps cover some costs in case of a failed delivery. Don’t forget to state this clearly during the customer purchase journey.

Customer Education: Educate customers about the costs and implications of order cancellations. Creating awareness can reduce the likelihood of frivolous orders and last-minute cancellations. Collaboration among key industry players may be required for this approach to work effectively.

Flexible Payment Options: Besides COD, businesses should offer multiple payment methods, such as credit/debit card payments, mobile money, or bank transfers. A diversified payment portfolio can reduce reliance on COD.

Selective COD Offering: Limit cash-on-delivery payment options for repeat customers or those with a history of successful transactions. For new customers, encourage prepaid methods until they establish trust.

Order Tracking and Communication: Provide real-time tracking and frequent communication about the order status. Keeping customers informed and engaged reduces the chance of them being unavailable or changing their minds upon delivery.

Efficient Return Management: Develop a streamlined process for handling returns. Efficiently managing returns can reduce additional costs and help resell returned items more quickly.

Geographic Limitations: Restrict COD to regions with a higher success rate or closer proximity to distribution centers. This strategy minimizes logistics costs and potential losses from failed deliveries.

Data Analytics: Use data analytics to identify patterns in COD failures. Analyzing customer behavior and delivery success rates can help inform decisions about offering COD.

Strong Customer Relationship Management (CRM): Maintain a robust CRM system to track customer interactions and preferences. Learning from your CRM can help personalize the shopping experience and build customer loyalty.

Incentives for Pre-payment: Offer discounts or added benefits for customers choosing prepaid options. Such offerings can shift more customers away from COD.

Insurance or Risk Sharing: To mitigate losses from failed deliveries, consider insurance options or negotiate risk-sharing arrangements with delivery partners. They could hold failed deliveries in their warehouse, where you can auction them off in pallets for willing buyers. This approach is beneficial when the cost of return erodes your profit margin.

In summary, while the growth potential of Nigeria’s e-commerce market is promising, challenges like Cash on Delivery present significant operational hurdles for small and medium businesses. However, through strategies like building customer trust, implementing pre-delivery confirmations, offering diverse payment options, and optimizing return management, these businesses can mitigate the risks associated with COD. Adapting to these challenges is essential for thriving in a dynamic market, balancing customer preferences with sustainable business practices. Ultimately, this balance is vital to harnessing the full potential of Nigeria’s burgeoning e-commerce sector.

Ogundimu is a Senior Product Manager at Amazon in Seattle, USA. Ahmed has 10+ years of experience as a web developer, digital marketer, and product manager. He has a wealth of experience managing and working with small and large e-commerce businesses in Nigeria and abroad. Additionally, Ahmed has deployed scores of digital solutions to help small businesses in Nigeria and abroad become successful. He’s an avid football fan and enthusiast of emerging technologies.

 

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