Cash on Delivery: What is It and How Does it Work? (2023) - Shopify (2024)

Shopping on the go has gained popularity as mobile commerce, retail apps, and online marketplaces like Amazon make it easier for consumers to browse, shop, and buy online. And as shopping options have expanded, so have payment methods. Some merchants have made online shopping even more appealing by offering cash-on-delivery (COD) payments.

For customers, COD minimizes the risk of paying for products sight unseen (and being satisfied with quality); while for merchants this payment model can strengthen brand reputation, due to its customer-service-friendly nature. Here’s what you need to know about this increasingly in-demand payment method.

What is cash on delivery (COD)?

Cash on delivery, or COD, is also known as “collect on delivery” and “cash on demand,” and is a payment method in which customers pay for mailed goods only after they receive and decide to keep them. If the customer chooses not to keep the items, they are returned to the retailer.

With cash on delivery, the retailer typically pays for the cost of shipping, since they don’t know if the customer will pay for the goods or not once received and must ensure return. The sale isn’t final until after the goods are delivered and the customer pays.

Cash on delivery vs. cash in advance

Cash on delivery differs from cash in advance in a key way. With COD, the retailer carries the costs and risk associated with shipping products to customers without a guarantee of customer payment. The customer places an order without prepaying (although many retailers offering cash on delivery require customers to place a deposit or card on file so they can be charged immediately if they decide to keep the goods).

Cash-in-advance payments require customers to pay for items before receiving them. In most cases, customers still have the option to return items if they’re not satisfied with them. However, unlike with COD, the merchant doesn’t ship any goods until they are first paid for.

How cash on delivery works

1. Place an order
2. Accept or return delivery
3. Make or decline COD payment
4. Select payment method
5. Complete the sale

Here’s a step-by-step look at how cash on delivery works for non-perishable goods.

1. Place an order

A customer places an order online through a catalog, over the phone, or in-store. In some cases, the customer pays shipping fees and/or a deposit, but they don’t pay for the ordered goods.

2. Accept or return delivery

After receiving shipment, the customer makes a decision: accept delivery and keep all or some of the items or decline the order and return the products.

3. Make or decline COD payment

Customers will either decline or make a payment with COD. In some cases, the merchants give a time limit for customers to make this decision.

4. Select payment method

If keeping any of the ordered products, customers must decide a method of payment. Most retailers have an ecommerce payment platform that allows customers to select the items they want to keep and either charge their credit or debit card on file or add new payment information. Acceptable forms of payment may vary by merchant, but some may also accept cash, check, or mobile wallets.

💡 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 helps ensure stock levels are accurate.

5. Complete the sale

Once the customer pays for the accepted goods, frequently through your ecommerce platform, the sale is complete.

Pros and cons of cash on delivery

Are you considering offering cash on delivery payments at your business? Weigh the pros and cons before making a decision.

Advantages of cash on delivery

Cash on delivery is beneficial to consumers for several reasons:

• Consumers can try products risk-free. Before paying for a purchase, it can be helpful to inspect items to see if they meet expectations. If the product is clothing, for instance, the buyer may have ordered various sizes, colors, or styles. Being able to pick the best fit risk-free minimizes financial outlay, since they won’t have to pay for everything in advance. This can make customers more willing to consider a purchase.
• Improves cash flow. Consumers are better able to track their cash flow and budget if only paying for products they plan to keep—versus paying for items upfront that (depending on the merchant’s return policy) may not be able to be returned for a full or partial refund if paid for upfront. With COD payments, consumers don’t have to rack up unnecessary debt if they order more than they intend to keep.
• Payment flexibility. Paying with COD can offer customers more payment option flexibility, which could make them more loyal to your brand and influence them to buy more over the long term.

💡 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.

Disadvantages of cash on delivery

COD payments bring some disadvantages to consumers and retailers alike, including:

• Waitlists and stockouts. If customers place bulk orders to try items in different sizes or colors, generally 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.

• No payment guarantees. COD is risky for retailers because they are producing and sending goods without a guarantee they are going to be paid for them.
• Cash flow management challenges. COD payment on delivery can create cash flow management issues for retailers because they don’t receive cash at the time of order that could be invested in other parts of the business.
• Lost profits. COD can expose retailers to increased returns and exchanges, which sometimes can be expensive to sellers if they are paying for return shipping, processing, and restocking expenses such as repackaging. These costs can add up, making COD a payment model that potentially results in lost profits.

4 types of payment methods for COD

1. Mobile payments
2. Cash
3. Check
4. Online card payments

While “cash” is in COD’s name, it’s not the only payment method merchants accept for this service.

1. Mobile payments

When a postal worker or delivery person has a mobile card reader on their person, they can process payments for delivered goods via a mobile POS system. Typically, mobile payments are useful for deliveries from restaurants or on-demand services.

📌 GET STARTED: Shopify Payments is one of the fastest ways to start accepting payments in-person, online, and on the go. It’s included in all Shopify POS plans, so you can skip lengthy third-party activations and go from setup to selling faster.

2. Cash

Couriers and delivery drivers can also accept cash payments, although this practice is increasingly uncommon. Further, this payment method presents a safety risk, as it can make couriers targets for crime.

3. Check

For some retailers, checks may be an acceptable alternative to cash. Even so, this form of payment tends not to be the most reliable: There may be payment delays while waiting for the check to clear, extra administrative burden during your accounting process, and a risk of nonpayment if the check bounces after the customer has received the product.

4. Online card payments

If you want to give customers several days to decide whether or not to keep products, online card payments are an option. Payment processing solutions offer a level of security unavailable with checks or cash. Shopify payments is one example.

3 examples of cash on delivery

1. Prime Try Before You Buy
2. Stitch Fix
3. Food delivery

Popular retailers are embracing COD as a way to make online shopping more convenient and less financially risky for consumers. Examples of businesses implementing cash on delivery include:

1. Prime Try Before You Buy

This Amazon service 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 to 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 log in to their Amazon accounts, indicate what they want, and then Amazon charges their card. Unwanted items must be returned.

2. Stitch Fix

Styling service Stitch Fix offers a form of cash on delivery. Customers fill out a style questionnaire and what kinds of clothes they’re looking for and their typical budget, and a stylist selects items that meet this criteria.

Stitch Fix customers don’t know what they are getting in their shipment and are charged a $20 styling fee per shipment. The fee can be used as a deposit toward items the customer decides to keep.

When customers make their decision, 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. The $20 styling fee isn’t returned if they don’t keep anything.

3. Food delivery

Food delivery is one of the most common examples of cash on delivery. Customers place a food order over the phone, online, or through an app. If they choose not to prepay online or over the phone, they must pay the delivery driver upon receipt of the order.

Customers can pay in cash, via a mobile card reader, or with any other method deemed acceptable by the restaurant. If they don’t pay, they don’t get their food.

Cash on delivery can pose risks for restaurants because these businesses are investing time, money, and ingredients to prepare dishes without knowing for sure whether the recipient is 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 for shoppers. By offering flexible payment options like COD payments, you also have a chance to strengthen customer brand loyalty and build a long-term relationship that positively impacts profitability through customer lifetime value.