What return-to-origin rate makes COD unprofitable for my store?

RTO means return to origin. It is what happens when a COD parcel cannot be delivered or is refused, and travels back to you. Every seller has some RTO. The useful question is how much you can tolerate before COD stops being worth it.

The idea

Each COD order goes one of two ways.

• Delivered, and you earn a profit
• Returned, and you lose money

The break-even RTO rate is the share of returns at which the gains and the losses cancel out.

The formula

Let profit per delivered order be P, loss per returned order be L, and RTO rate be r (as a fraction).

Break-even is when P x (1 - r) = L x r.

Rearranged, r = P divided by (P + L).

A worked example

Say profit on a delivered order is Rs 200 and the loss on a returned order is Rs 150 (illustrative). Loss includes outbound and return shipping and packaging, and it assumes the product comes back resalable.

200 x (1 - r) = 150 x r 200 = 350 x r r = 200 divided by 350 = 0.571

So your break-even RTO is about 57.1 percent. If more than 57 in every 100 COD parcels came back, you would lose money on COD in total.

Do not read that as safe

57 percent sounds like a very comfortable margin, but it is a cliff edge, not a target. You would not want to operate anywhere near it, because that is the point at which you earn zero on all your COD effort. Also, many sellers have costs not included in the loss figure, like the ad cost per order and damaged stock, which make the true break-even much lower.

A safer working range

Look at what each RTO rate leaves you per 100 orders, using the same numbers.

• At 10 percent RTO, 90 x 200 = Rs 18,000 minus 10 x 150 = Rs 1,500 leaves Rs 16,500
• At 20 percent, 80 x 200 = Rs 16,000 minus Rs 3,000 leaves Rs 13,000
• At 30 percent, 70 x 200 = Rs 14,000 minus Rs 4,500 leaves Rs 9,500
• At 40 percent, 60 x 200 = Rs 12,000 minus Rs 6,000 leaves Rs 6,000

Every 10 points of RTO takes roughly Rs 3,500 off your result per 100 orders. That is Rs 35 per order lost to each additional point.

Pick a ceiling, such as the RTO rate at which your COD profit falls to half of the best case, and treat anything beyond that as a signal to act. Here that would be near 30 percent in this illustration.

Updating the formula with your own numbers

• Profit per delivered order, from your costing sheet. See how to calculate contribution per order.
• Loss per returned order, from your courier statement. Cost of one refused COD order walks through it.
• Your actual RTO rate, which is returned parcels divided by shipped COD parcels over a month.

What to do if your rate is high

• Confirm orders before dispatch
• Check pincodes that return the most
• Offer a prepaid benefit
• Consider asking for a small advance on COD, as described in is it worth asking for a small advance on COD orders

Also see returns and RTO, the numbers nobody tells you. Knowing your real break-even keeps COD working for you rather than quietly working against you.