Pre-Paid Legal
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Pre-Paid Legal Services, Inc. (PPLS) utilizes the differentiation competitive strategy by providing a unique, wide-range of legal service insurance. PPLS offers customers these services through packages that the customers pay monthly, semi-annually, or annually. PPLS also earned revenue from a multi-level program that charged potential sales associates a fee to sell the company’s services. This became its primary source of revenue and by 1998 was responsible of 76% of annual sales.
The key success factor of PPLS was most notably their two sources of revenue, specifically the multi-level source which also afforded them cheap marketing. PPLS experienced remarkable growth through limited expense due to the motivation created by the multi-level program for prospective sales associates to sell. This also, however, presents a business risk, since the stability of customers acquired by these “trained” associates is unknown and could lead to uncollectible revenues. The growth of the company might also present a risk in that such rapid increases in cash flow could be followed by a definitive reduction in cash flow if members’ cancellation rate increases and PPLS is forced to recover commissions.
Attention should be directed to the growth numbers achieved by PPLS. It seems the method by which PPLS disbursed commissions to associates for new members and recorded them starting in 1995 might have caused an unrealistic measure of growth compared to pre-1995 growth. The membership commission advances represented on the balance sheet will likely necessitate recovery as growth continues and the performance of sales associates reaches its peak and begins to decline. It seems probable that membership renewal will decrease. Also, earnings appear stronger than they really are because the commissions are spread out over a three year period rather than recorded when they were disbursed. This clouds the transparency