Prepaid Legal Case Summary
Case Analysis of Prepaid Legal
1. Prepaid Legal is one of the earliest companies in the United States to market and to sell legal expense plans. The company adopts a cost leadership business strategy, providing 5 basic title benefits (Preventive Legal Services, Automobile Legal Protection, Trial Defense, IRS Audit Protection Services, and Preferred Member Discount) with a membership cost ranging from $10 to $25 per month. Moreover, Prepaid selects several market segments, in which it develops specific plans (Commercial Driver Legal Plan, Law Officers Legal Plan, and Business Owners’ Legal Solutions Plan) to compete.
The key elements of PPD’s business strategy include: * Marketing method * Multi-level marketing strategy
Multi-level …show more content…
With a leaner structure, PPD focuses on continuing and increasing the number of digital satellite subscriptions sold, and thereby increases the value of the TPN communication platform. * The company currently markets Memberships on a closed panel basis, according to which the provider attorneys are paid a fixed fee on a per capita basis. Because such fixed fee payments do not vary based on the type and amount of benefits utilized by the members, closed panel memberships provide significant advantages to the Company in managing claims risk. * …show more content…
The major problem with the third quarter announcement is the inconsistency resulted from PPD’s increasing revenues and EPS and its decreasing cash flow. Although EPS increased 50% and the company met the expectation of Wall Street, cash flow from operations decreased $379,000, or 7%. Investors may perceive this inconsistency as a signal of manipulation or fraud.
The cause of this problem was PPD’s accounting method for advanced commission, in which commissions are paid to sales associates before premiums are collected from members. When the 134,725 new memberships were sold during the third quarter of 1999, the company paid a great deal of advance commissions to its sales associates. As a result, the free cash held by the company decreased significantly. Also, by classifying these business expenses as assets, it’s possible that PPD’s earning might be overstated. Moreover, another issue worthy of mentioning is the retention rate of sales associates.
3. One alternative method is to expense commission cost as it occurs, rather than capitalize commission as assets. So we cut all the net capitalized commission in assets, and expense the membership commission immediately. Then the earning for the third quarter is estimated as
1. Prepaid Legal is one of the earliest companies in the United States to market and to sell legal expense plans. The company adopts a cost leadership business strategy, providing 5 basic title benefits (Preventive Legal Services, Automobile Legal Protection, Trial Defense, IRS Audit Protection Services, and Preferred Member Discount) with a membership cost ranging from $10 to $25 per month. Moreover, Prepaid selects several market segments, in which it develops specific plans (Commercial Driver Legal Plan, Law Officers Legal Plan, and Business Owners’ Legal Solutions Plan) to compete.
The key elements of PPD’s business strategy include: * Marketing method * Multi-level marketing strategy
Multi-level …show more content…
With a leaner structure, PPD focuses on continuing and increasing the number of digital satellite subscriptions sold, and thereby increases the value of the TPN communication platform. * The company currently markets Memberships on a closed panel basis, according to which the provider attorneys are paid a fixed fee on a per capita basis. Because such fixed fee payments do not vary based on the type and amount of benefits utilized by the members, closed panel memberships provide significant advantages to the Company in managing claims risk. * …show more content…
The major problem with the third quarter announcement is the inconsistency resulted from PPD’s increasing revenues and EPS and its decreasing cash flow. Although EPS increased 50% and the company met the expectation of Wall Street, cash flow from operations decreased $379,000, or 7%. Investors may perceive this inconsistency as a signal of manipulation or fraud.
The cause of this problem was PPD’s accounting method for advanced commission, in which commissions are paid to sales associates before premiums are collected from members. When the 134,725 new memberships were sold during the third quarter of 1999, the company paid a great deal of advance commissions to its sales associates. As a result, the free cash held by the company decreased significantly. Also, by classifying these business expenses as assets, it’s possible that PPD’s earning might be overstated. Moreover, another issue worthy of mentioning is the retention rate of sales associates.
3. One alternative method is to expense commission cost as it occurs, rather than capitalize commission as assets. So we cut all the net capitalized commission in assets, and expense the membership commission immediately. Then the earning for the third quarter is estimated as