Shopping from the comfort of home has gained widespread popularity over the last several years because of the COVID-19 pandemic. Thanks to online shopping, it’s very convenient to buy what you need without having to go to the store.
As shopping options have expanded, so have payment options. Some merchants have made online shopping even more appealing by offering cash-on-delivery payments, thus reducing customers’ financial risk. In this post, we’ll give you the full scoop on everything you need to know about this increasingly in-demand payment method.
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What is cash on delivery (COD)?
Cash on delivery (COD), also known as “collect on delivery” and “cash on demand,” is a payment method in which customers don’t pay for mailed goods until they’ve received and decided to keep them. If the customer doesn’t want to keep the items and pay for them, they go back to the retailer.
With cash on delivery, the retailer carries significant financial risk, and usually pays for the cost of shipping, because they don’t know if the customer will end up paying for the goods. The sale isn’t final until after the goods have been delivered and the customer has decided to pay for them.
Cash on delivery vs. cash in advance
How does cash on delivery differ from cash in advance?
With COD, the retailer carries the costs and risk associated with shipping products without a guarantee that the customer will buy them. The customer places an order without committing to the purchase.
However, most retailers who offer cash on delivery require customers to place a deposit or put a card on file so they can be charged if they decide to keep the goods. Despite what the name suggests, the customer usually doesn’t have to make a decision immediately upon delivery. Instead, they can decide whether or not to keep and pay for the items after receiving, inspecting, and (in the case of apparel) trying them on.
With cash-in-advance payments, customers pay for items before they receive them. In most instances, customers still have the option to return items if they’re not satisfied with them. The key difference is that the merchant doesn’t ship the goods until they’ve been paid for.
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How cash on delivery works
Here’s a step-by-step look at how cash on delivery works for non-perishable goods.
First, a customer places an order online, through a catalog, over the phone, or even in store. In some cases, the customer will pay shipping fees and/or a deposit, but they don’t pay for the goods they’re ordering.
When the customer receives the shipment, they either pay for it immediately, or they have a time limit during which they need to decide which items to keep. If the customer doesn’t want to keep the items, they can return them to the merchant without paying for them.
If the customer wants to keep all or some of the items in their shipment, they need to pay for them. Most retailers have an online platform that allows customers to select the items they want to keep and either charge the card on file or add new payment information.
💡 PRO TIP: When you use different platforms to run your online and retail stores, inventory discrepancies are more likely to happen as a result of both systems not being in sync with one another. This can lead to more frequent inventory counts to reconcile differences between your ecommerce platform and POS system’s inventory quantities and ensure stock levels are accurate.
Cash on delivery works in a slightly different way if you’re dealing with perishable goods, such as a delivery order from a restaurant. If a customer doesn’t pay for their delivery in advance, they need to pay the delivery driver directly. If the customer fails to pay for their food, the delivery driver won’t hand it over.
Pros and cons of cash on delivery
Are you considering offering cash on delivery payments at your business? Weigh the pros and cons before you make a decision.
Advantages of cash on delivery
Cash on delivery is beneficial to consumers for a number of reasons. Consumers can try products risk-free before making a decision, which is great when they’re shopping for something they may need to order several versions of, such as clothes. With cash on delivery, customers can order multiple sizes, colors, or styles and find the right fit without taking on the financial burden of paying for these items ahead of time.
Ultimately, COD improves cash flow management for consumers because they don’t rack up debt if they order more than they intend to keep.
This improved cash flow is also beneficial to merchants, because customers may order more items than usual. When customers do that, it increases the chance that they’ll retain more of those items.
💡 PRO TIP: Sending digital receipts via email is a great way to organically collect customer contact information at checkout and build an email list to fuel your retention marketing. Just make sure they’ve opted in to hearing from you before sending them anything.
While COD is riskier for retailers than for consumers, retailers can charge a deposit or delivery fee to outweigh the costs of making a delivery without a guarantee that it’ll turn into a sale.
Disadvantages of cash on delivery
If customers place bulk orders to try items in different sizes or colors, there’s a greater chance that items other shoppers want will be out of stock while the merchant processes returns. The resulting waitlists and stockouts can create a frustrating customer experience.
COD is risky for retailers because they’re producing and sending goods without a guarantee that they’ll be paid for them.
Cash on delivery also creates cash flow issues for retailers, because they don’t receive cash at the time of order that they could invest in other parts of the business.
Furthermore, COD can lead to increased return rates. In some cases, returns are too costly for retailers to process, so COD can result in lost profits.
Types of payment methods for COD
- Mobile payments
- Online card payments
While “cash” is in COD’s name, it’s not the only payment method merchants can use for this service.
When a postal worker or delivery person has a mobile card reader on their person, they can process payments for delivered goods immediately. Mobile payments are useful for deliveries from restaurants or on-demand services.
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Couriers and delivery drivers can also easily accept cash payments. However, this payment method presents a safety risk, as it can make couriers targets for crime.
Checks are a suitable alternative to cash and immediately. Mobile payments are useful for deliveries from restaurants or on-demand services. when you need items to be paid for immediately upon delivery. However, this payment method isn’t the most secure option, because you won’t know if a check has bounced until after the goods have been handed over to the customer.
Online card payments
If you want to give customers several days to decide whether or not they want to keep products, online card payments are the best option for all parties involved.
Examples of cash on delivery
Popular retailers are embracing COD as a way to make online shopping more convenient and less financially risky for consumers. Let’s see how these businesses are implementing cash on delivery.
Prime Try Before You Buy
This service from Amazon lets customers try on clothes, shoes, and accessories in multiple sizes, colors, or styles, before committing to pay for them. While shoppers need to have an Amazon Prime account and a card on file to take advantage of this service, they’re not charged until they decide what they’ll keep.
Customers can select several items to try before they buy. After they receive the shipment, they have seven days to decide what they want to keep. When they’ve made a decision, customers login to their Amazon accounts, indicate what they want, and then Amazon charges their card.
Then they place unwanted items into the prepaid return bag that came with the shipment and drop the bag off with a postal service or at an Amazon location to return the items.
Styling service StitchFix also offers a form of cash on delivery. Customers fill out a questionnaire about their style and what kinds of clothes they’re looking for, and a stylist selects items that meet these needs.
Unlike with Amazon, Stitch Fix customers don’t know what they’ll get in their shipment. Also unlike Amazon, which sends items free of charge, Stitch Fix charges a $20 styling fee per shipment, which can be used as a deposit toward items the customer ends up keeping.
When customers decide what they want to keep, they go to Stitch Fix’s website, make their selection, provide feedback on how their next shipment could improve, and check out with the payment method on file.
Stitch Fix customers pay for what they want to keep, and return what they don’t. If they don’t end up keeping anything, they don’t get the $20 styling fee back.
Food delivery is one of the most common examples of cash on delivery. Customers place a delivery order over the phone, online, or through an app. If they don’t prepay for the food online or over the phone, they need to pay the delivery driver.
When the driver arrives, customers need to pay–in cash, through a mobile card reader, or any other method acceptable to the restaurant. If they can’t pay the driver, they don’t get the food.
Cash on delivery is risky for restaurants. These businesses are investing time, money, and ingredients to prepare dishes without knowing for certain whether the recipient will be willing and able to pay.
Implement cash on delivery at your store
For innovative, tech-embracing retailers, cash on delivery presents an opportunity to make online shopping more appealing to customers. The convenience of not carrying debt is a big draw to shoppers.
By reducing customers’ debt burden, merchants may enable shoppers to order more and end up keeping more than they thought they would.
Take control of your cash flow
Always know when to expect payouts. Every Shopify plan comes with Shopify Payments, which lets you track in-store and online sales and payments from the same back office.