Why I Don't Believe In COD: Canvera's Dhiraj Kacker
Payments systems (or lack of them) are a very big problem for India e-commerce and as much as COD is being touted as the panacea to get over the hurdles of reach and consumer trust, I am just not able to buy the story. To me it seems like optimizations to COD are like trying to make the horse run faster while what we need is an automobile (sorry Henry Ford!). Stretching the analogy, we not only need the automobile, we also need the support infrastructure of petrol bunks, repair shops, credit agencies etc. The equivalent of the automobiles in payments are well penetrated and reliable electronic payment systems, which in turn require good credit rating agencies, trust worthy law enforcement etc. A very tall order to achieve in a few years when there is generally low trust, low penetration and insipid growth if any (credit card penetration is stuck at 20M for last few years) of electronic payment systems.
I am firmly in the camp of people who believe that the e-commerce bubble is going to burst soon and while I think there are many fundamental reasons why this will happen, if you forced me to pick only one I would pick lack of electronic payment systems in India.
Before I explain any further, let me state two key assumptions:
- I am primarily talking about COD in the context of high volume, low gross margin (<Rs1000) products
- I am assuming that mid-term profitability is important
Sources of Fixed Cost in COD
I explained the LTV impact of COD in a previous post. Let me expand on this further and list down the sources of fixed cost per collection:
- Cost of physically traveling to collect money: Number of trips that need to be made to collect the money and the cost of these trips especially given high petrol prices
- Cost of consumer changing their mind: If the money is not charged immediately when the consumer is in the buying window, large % will change their mind when the order is delivered (anecdotally I have heard 30% "return" rates being quoted in the industry today)
- Cost of managing cash and reconciliation: This requires people based processes to count, store and deposit money in the bank in addition to manually reconciling the money with the right order
- Fraud: This has many sources, including the collections person running away with the money, fake currency notes, collusion between the collections team, law enforcement issues with someone carrying significant cash etc.
- Hiring, re-hiring, training and management of the collections team. This will be a huge fixed cost borne by the company
And finally, there is the scale challenge. If the GMV value (not revenues â€“ and can we please stop calling GMV revenues, it discredits everyone in the startup eco-system!) of e-commerce transactions in India is to reach $1B annually (so ~$100M in revenues) and the average GMV value is $20 then we need 50M transactions â€“ even if 60% of these are based on COD, it means 30M transactions of $20 at a time being handled and reconciled by people. Let me say it again, for $100M in revenues there will be 30M POPLE-BASED transactions to collect and reconcile the money. There will be management layers to manage the team, hiring and retention (and replacement will be an issue) as the company will require low-skilled workers to try and make the math work. A rudimentary calculation assuming 6 collections per person per day means that the front-end collections team will have to be of about 15,000 people and probably half the size of this team to do the backend operations. Most of the front end team will probably earn Rs5-7K/month. To keep a reliable force out in the field (not in a factory where it is easier to manage a team) there will be significant management overhead and constantly having a pipeline of 10-20X the team strength (i.e. 150K-300K people) for replacements. Then there are the costs of career planning and growth for this work force.
It just is really hard to see how this will work when transactions gross margins are low and nothing that I have heard or seen in the last 9 months of this bubble is able to convince me otherwise. The COD payments business is a services business and in order for the math to work, it needs to quickly transform to a products business, i.e. be replaced by an electronic payments system. That will take a lot of time. A.Lot.Of.Time.
(Dhiraj is CEO & Co-Founder of Canvera.com, an online Digital Photography company based out of Bangalore.)