Q1) How does PPLS create value for its customers? What are the critical risks that it has to manage well?
Ans) PPLS creates value for its customers by insuring their future legal costs by charging an advance premium monthly . It sells memberships, which allow members to access legal services through a network of independent law firms in each state of USA. It also promotes multi-level marketing by encouraging members to become associates and get commission for any new member who joins by their referral.
Critical risks that it has to manage are
- Non-collection of commissions already advanced to associates when members fail to pay their premium dues.
- Also when there is a increase in writing of new contracts then there will be a shift of people to the new policy and so termination of old subscriptions which leads to a loss of revenues.
- Cost of membership benefits is expected to be 35% of premiums collected. If this further increases then it is a source of risk.
- Too much dependence on associates to market their products.
Q2) How did the pre-1995 commission formula work? Why do you think the company changed its policy?
Ans) In the pre-1995 commission formula, 70% of subscription amount at inception of contract with a customer was paid as commission in first year and 16% monthly in subsequent years. This used to hit the income statement directly as expenses in the first year. But later the company changed its policy by paying and advance of 25% of subscription of 3 years worth of commissions in the first year itself but recorded it evenly over the 3 years of its duration. So, now the expense is spread over the 3 years making the profit and loss statement look good.
Also it is a scheme that serves as an incentive for the associates so that they create more new memberships.
Q3) Based on the post-1995 commission formula and information in the case on pricing and commission rates,...