COD Cancellation: How to get your real profit
Your Real profit hidden in the name of receivable money. Here is the one simple change gives you the profit it in hand.
In India, 60% of online orders are placed with the Cash on Delivery (COD).
20% of their COD orders are getting cancelled or rejected during the delivery of the orders.
Even in some clothing brands, the return rate is 40-50%, including before & after delivery.
It looks easy to see those numbers.
Your marketing team shows good ROAS, like 4X, 5X, or even 6X. It looks good in the Excel sheet and sometimes appears nicely in your profit and loss statement.
But this is a really big problem. We underestimate and burn real cash. Fortunately, having clarity at the beginning of the month and allocating the right budget to the marketing team helps you get the actual profit you want.
Here is what the CFO & Founder conversation looks like:
Founder: What was the profit for the last month?
CFO: 15% Profit
Founder: Great. Where is the Profit Money? Can you transfer it to my savings account?
CFO: We paid the expense bills using money in the account because we have 50% of the revenue receivable. Profit is in the receivable money. It takes 30 days to receive it fully.
Founder: Great. Let’s wait for a month.
CFO: Sure. Have a nice day.
Founder: Hey, CFO, how are you doing? It's been a month. Can we take a 15% profit?
CFO: No. Wait, wait. We can't take 15% of the profit. We had 7% of cancelled and RTO orders, which led to customer cancellations & RTO. Then, it spent 1% on RTO charges and other expenses. The final profit is 6%.
Founder: 🥺
Does the conversation sound familiar?
This is not something happening to you. As we know, 60% of orders are in COD.
Currently, UPI and digital payments are booming in India, and people are travelling without cash because everyone has UPI payments in every corner of the country.
Then why do people misuse COD orders & send them back without considering how it impacts the brand?
Here are the common reasons why most cod orders are cancelled & RTO.
In my experience, this mostly happens due to the customer's mind changing before getting the delivery or recently being overspent in other places.
The worst thing is that Delivery persons are not delivering the products. They are just marking them as “undeliverable” and making RTO.
These things can happen in many cases. But we don’t have control over the activities.
We can control the input in the final stage rather than trying to control it.
I have tested several strategies across brands, which helped reduce RTO or take Profit with minimal RTO.
The first change should start with you!
Yes, from you only.
First, you must understand how much Topline revenue you are generating & how much money is wasted in the cancel & RTO.
You must do this first because you can allocate the proper marketing budget after the Cancel & RTO based on the REAL REVENUE, not just topline revenue.
there are some strategies out there that you can use to reduce the RTO before delivering the products.
In this newsletter, we will explore why it is important to have clarity on what is happening & what things need to be done.
Based on the above conversation with the CFO, the initial profit was 15%. Naturally, you think the brand is making a profit.
But this cash is never going to come. You will have a case flow issue every month.
You will have the payable bills, but your account does not have money to pay them. You will be in a situation where you cannot pay for that.
This is the worst situation for entrepreneurs. They end up paying the bill with their personal savings to keep running the brand.
In fact, it took me 6 months to get clarity and fix the gap in the accuracy of the receivable money while we built the profitable D2C brand.
It should not take much time for you!
It is a simple shift, but it has a Maximum impact on Profit & growth.
Check your last 6 months’ cancelled & RTO orders avg. Here is the formula:
Cancel/RTO = (Total Cancel and RTO Orders / Total Orders)*100
Example:
Cancel/RTO = (20 /500)*100 = 4%
I am not saying 4% is good or bad. It is just an example; it changes from industry to industry.
Next, calculate your real revenue.
Here is the formula to calculate actual revenue after the RTO & Cancel.
Top-line revenue - Cancel/RTO = REAL REVENUE.
I hope everyone knows this.
But they ultimately look at these metrics at the end of the month, when we have already lost profit.
ESTIMATE your RTO and cancel orders at the beginning of the month. Allocate all expenses to actual revenue, not to topline revenue.
Let me tell you again.
Allocate marketing or any expense budget to the real revenue, not to the topline revenue.
By implementing this, you can minimize the overspending based on topline revenue.
You have control over the expenses because you already planned for the actual revenue.
Finally, your target ROAS matches the final profit that you want to take.
Trust me! This simple change in the estimation & budget allocation helped to see the profit at hand.
No investment is needed for this. So try & see what happens.
Also, let me know how it comes. I am curious about this.
Generating topline revenue is easy with ads, email, and place, but money leaks faster than it receives. Every day, I work with D2C brands to enhance the D2C brand growth that drives profit. Visit my blog to learn more.