Pricing cash-on-delivery orders with RTO in the model

A COD order that comes back costs you two shipments and a blocked unit of stock. Put that probability into the price, the fee or the eligibility rule.

Return-to-origin (RTO) happens when a parcel is refused or can't be delivered and travels back to you. For cash-on-delivery orders the customer has paid nothing, so every RTO is pure cost: forward shipping, return shipping (often charged at a similar rate), packaging, handling and the days the unit is out of saleable stock.

Expected cost of a COD order

Expected RTO cost per COD order = RTO rate × (forward shipping + return shipping + packaging + handling + damage write-off).

Illustrative: with a 20% COD RTO rate and ₹190 lost per failed parcel, each COD order carries ₹38 of expected RTO cost before anything else.

Compare that with your prepaid RTO rate, which is usually far lower because the customer has committed money. The gap between the two expected costs is what COD really costs you per order.

Three levers

Charge a COD fee close to the expected cost gap, and say why on the checkout page.
Offer a prepaid incentive (a small discount or faster dispatch) worth less than the gap.
Restrict COD by pincode, order value or customer history where your own data shows high RTO.

Measure it from your own data

Export shipments for the last 90 days with payment mode, pincode and final status.
Compute the RTO rate separately for COD and prepaid, and for your top pincodes by volume.
Re-run monthly: courier performance and customer mix change, and so does the right fee.