Pre-Paid Legal Services (PPLS) marketed its memberships through a multi-level program that encouraged buyers to become salespeople. Members that sought to become sales associates paid the company a fee of $65 to cover the cost of training materials, training meetings, and home office support services. Registered sales associates sold the company's services to their friends and business associates. The most successful even recruited their sales force. Sales associates were compensated on a commission basis. Prior to 1995, associates that signed up a new member received a commission of 70 percent of the first year premium and up to 16 percent commission for subsequent year renewals. First year commissions were paid in advance whereas renewal commissions were paid as premiums were received.
In a Fortune magazine article, the author sites concerns around PPLs income growth being improved by the spreading of commissions across a three-year period, even though the full 3 years commission is paid to the seller at once.
They contend that the earnings would be flat if they recognized commissions at once. The article speaks of the retention rate of subscribers at 75%. The article also claims the cancellation rate to be 24%.
With these retention rates and accounting practices, PPL's net earnings would not be severely hit during the years of 1997 and 1998, with a reduction of net earnings adding back in the capitalized commissions. The company still showed strong income growth. The new sales were growing at an enormous rate. As long as the company keeps their growth the retention rate will be applied to an increasingly large subscriber base.
One major problem is the matching of expenses and when do the benefits actually occur. PPL signs a subscriber for $19 a month and pay a three year commission of $171. The...