India’s vibrant internet market is not only extensive but also rapidly expanding and evolving. Within this dynamic e-commerce sector, companies like Amazon, Flipkart, and Ecom Express are grappling with a major challenge: failed deliveries.
Known as RTO (return to origin) in e-commerce jargon, failed deliveries are most common when a customer opts for a cash-on-delivery (COD) mode of payment while placing the order.
According to ET Prime Research, approximately 60%-65% of e-commerce orders placed in India are facilitated through COD. Alarmingly, a significant 25%-30% of these orders end up in RTOs.
In sharp contrast, the failure rate for deliveries paid through pre-paid orders stands at a mere 2% to 3%. This discrepancy underscores the unpredictable nature of customer commitment when COD is chosen, potentially leading to a higher incidence of order cancellations.
Now, let’s understand what failed delivery actually means in the e-commerce industry and why it occurs.
Failed Cash on Delivery in E-commerce
When a purchased item is either returned or not successfully delivered, it triggers what’s known as reverse logistics. This encompasses two scenarios:
- Reverse pick-up (RPU): Where a delivered item is later returned by the customer.
- Return to origin (RTO): Where the customer doesn’t receive the delivery, prompting the product to be sent back to the warehouse or seller’s location.
It’s estimated that reverse pick-ups account for up to 5% of overall shipments, while the incidence of return to origin is significantly higher, ranging from 40% to 50%.
Root Causes of Failed Deliveries
As e-commerce adoption in India continues to surge, the number of Return to Origin (RTO) cases also increases with each passing year. This trend is largely attributed to the widespread use of Cash on Delivery (COD) as the primary payment method among Indian customers.
In December 2022, GoKwik, an eCommerce enabler, reported that cash on delivery transactions accounted for approximately $30 billion of India’s eCommerce market.
Unlike in developed countries, where customers tend to place orders only when they genuinely intend to purchase, Indian shoppers often prioritize cost-saving and continually hunt for the best deals even after placing their orders.
Ankush Jindal, associate director at Shiprocket, an e-commerce logistics aggregator, sheds light on Indian shoppers’ behaviour. He explains that customers in India are aware that by choosing COD, they have the flexibility to reconsider their purchase decisions. Even after placing an order, they may continue to search for price discounts and may cancel their order if they find a better deal on another platform.
Another contributing factor to product return to origin in India includes situations where the customer is unavailable to receive the shipment, cannot be contacted during delivery, provides an incorrect address, or cancels the order while the shipment is in transit due to a change of mind. Furthermore, instances occur where the shipment reaches the address, but the customer refuses to accept the delivery as they no longer desire the product.
The low RTO rates in many developed countries can be attributed to the absence of Cash on Delivery (COD), as transactions predominantly rely on pre-paid methods. However, countries such as Saudi Arabia, the UAE, Indonesia, and the Philippines also embrace cash on delivery. Therefore, in the UAE and Indonesia, RTOs account for a notable 15%-20% of COD orders.
Impact of Return Shipments on D2C Brands
Although the impact of Return to Origin is felt across all e-commerce platforms in India, it poses a particularly acute challenge for new Direct-to-Consumer (D2C) brands. If a significant portion of cash on delivery orders ends up as RTOs, it can significantly dent their financial performance.
Social commerce, another e-commerce segment in India, also grapples with exceptionally high RTO rates, often reaching 35% to 40%.
Sellers bear the brunt of additional costs associated with return shipments, incurring expenses not only for the return journey but also for the forward freight of the item. This added financial strain is especially burdensome for smaller brands.
Ankush Jindal of Shiprocket underscores the impact, emphasizing that larger brands with higher order volumes can negotiate lower freight rates with logistics partners, mitigating some of the financial strain.
Furthermore, the return shipment often takes much longer than the forward journey, leading to potential product damage or inventory loss. This not only impacts the seller but may also affect customer satisfaction.
For big brands, even a 5% RTO rate is significant due to their high order volumes, resulting in substantial total RTO costs. The industry has undergone a learning curve to address RTOs, recognizing it as a 50:50 problem from both the logistics and consumer sides rather than solely a logistics issue, as previously believed.
In a Nutshell
To mitigate RTOs, all brands must employ various strategies, including customer profiling based on historical data to predict cancellation probabilities, address correction tools, and interventions such as part-pay options or imposing fees on COD orders to deter high-risk customers. However, these solutions come with trade-offs, potentially leading to order losses or increased operational complexities.
As long as COD strives to be a dominant payment method, managing Return to Origin (RTO) incidents will continue to be a significant challenge for e-commerce players in India. The industry must focus on identifying and implementing effective solutions that reduce failed cash on delivery occurrences without sacrificing customer satisfaction.
