Recently Tech in Asia wrote about how Indonesian startups still find ways to overcome the payment infrastructure challenges in the country. One of the most popular ways for online shops to cater to users without credit cards or bank accounts is to offer cash-on-delivery (COD). Users will log on to their favorite e-commerce site, add an item or two to their shopping cart, enter in their address, and then pay for the item in cash once it arrives at their doorstep.
Naturally, some consumers will take advantage of COD at the expense of the company. Sometimes there are customers who “cancel” their purchasing decision after the product is delivered and they take a look at it. In other cases, customers will order two to three units of the same product but in different sizes or colors, then choose the one they want when they all arrive via courier.
Still, many well-known stores like Zalora and Lazada continue to offer this rudimentary but effective payment option. To clarify some assumptions about COD, Tech in Asia spoke with Zalora Indonesia co-founder Hadi Wenas, who laid out six basic facts for us.
1. Indonesians love COD
Wenas tells us that bank transfer is the most popular payment method on Zalora Indonesia, accounting for half of all the site’s transactions. COD, meanwhile, makes up 40 percent of all the site’s transactions. The remaining 10 percent of transactions are conducted by credit card. At Zalora’s sister company Lazada Indonesia, COD is the most popular payment method.
2. Yes, returns upon delivery happen
An obvious concern for businesses wary of COD would be the ease with which a customer can make “returns.” Of course, until the money leaves the hands of the consumer, no purchase has officially been made, no matter how many items he or she may have ordered. Buyers can turn into browsers at any moment, and the company still has to pay for time and labor lost.
Do these customers exist? Wenas says yes; but there’s not a lot of them. He says that item returns happen in less than five percent of all deliveries. As for customers returning an item in order to exchange it, that happens in under five percent of cases too. About half of all those returns happen immediately upon delivery (called “return at door”).
3. Few customers make bad returns
When is it okay to return items to online shops? For Wenas, it should fulfill these three conditions: whether the item is the same item the customers ordered, whether the item is still new (not yet used, still clean and complete with brand tag and box), and whether the item is undamaged.
Despite having the conditions above explained on the website, there are still some customers who try to outsmart the system. Some customers return dirty shoes after they’ve been used, some even try to scam Zalora Indonesia by ordering genuine Crocs but return fake ones they’ve bought elsewhere. Bizarrely, some customers have ordered shoes but attempted to return sandals instead. But all of the above don’t happen often.
Wenas’ system to battle that is to be strict about his returns policy. If customers try to cheat the system, they do not get a refund.
It’s true that COD reduces the “cost” of returns for consumers; but so long as they are happy with the product and service, then they won’t need to return anything. Of course Zalora doesn’t accept item returns for certain product categories, like perfume and underwear.
4. COD is not the main reason for returns
Wenas explains that while COD eases the return process, it’s not the main driver behind it. The biggest reason for returns is the lack of information regarding the product. This happens when the website doesn’t show detailed enough product descriptions and measurements, and the item doesn’t match the customers’ expectations.
To mitigate this risk, Zalora Indonesia makes sure to take high-quality photos of its products while providing as much information as possible, like exact measurements. The Zalora warehouse has its own measuring tables for shoes and shirts, so they can put in the most precise measurements possible.
Another reason for product returns is bad service. Wenas admits to seeing quite a few returns because customers were angry simply because the delivery took a long time. This occurred often during the first three to six months of Zalora’s operations, but incidents have since become less frequent.
5. More mature markets equal more returns
Contrary to what most would assume, Wenas believes that as a market matures, it becomes even more likely that people try to take advantage of the COD system by ordering multiple items and then picking one when they all arrive.
“The return rate for developed countries should be two to three times bigger than us,” says Wenas. Lazada Indonesia’s Rizki Suluh Adi says that US-based Zappos even offers a one-year return policy, which contributed to the site’s growth in that country.
Wenas believes that for fashion products, it is normal that people don’t get the perfect size at the beginning. He sees two reasons higher return rates in more mature markets: they are not reluctant to pay first before ordering multiple products (for them to try on first and then return) and they are confident that they can return the items. With those two reasons combined, it helps persuade customers to make online purchases.
Still, Wenas is okay with last-minute returns (including those who order multiple products in order to try it on first). He sees COD as a way to encourage people to switch from offline shopping to online shopping. COD can help bridge consumers’ need to see and feel the product. If the hassle of processing a last-minute return helps Zalora Indonesia gain a repeat customer, then it’s a net win.
6. Indonesia’s logistics companies are more open to COD
Zalora Indonesia handles its own deliveries for the Jakarta area, and partners with three independent logistics companies to handle the rest of the nation. He recalls having some difficulty persuading those companies to help with COD payment methods in the company’s early days.
But once the smaller logistics companies started handling COD for e-commerce firms in Indonesia, Zalora’s partners dropped their reservations. Now that e-commerce is well-established enough in Indonesia, logistics firms understand the risks of COD and can carefully pick and choose which e-commerce firms to work with.
The second problem comes when the logistics companies need to deal with returns at the door. It wouldn’t be a problem if customers returned the products themselves and paid for the delivery to the Zalora warehouse. But if the logistics companies need to return the product to Zalora, that becomes a different problem.
When customers make returns at the door, it falls on the logistics companies to pick up the pieces. To save up money for the delivery process, the logistics companies tend to store many returned items first in their pool before delivering them back. If the returned goods haven’t got back to Zalora’s warehouse, the customers won’t get store credit reimbursement. That makes customers feel anxious.
The only way to work around this is to establish good a partnership with the logistics companies so all can be happy.
COD, while popular, has its own challenges. Hopefully this answers a few questions for online shops that want to offer a similar payment service in Indonesia.
(Editing by Paul Bischoff, Josh Horwitz, and Steven Millward)