Pre Paid Packages

With the saga of True Spa being brought to light again recently, it has brought to question the business structure of pre-paid packages. I am sure, they are not the first company to have such problems, neither will they be the last. When buying into a package that potentially last for years, you are practically investing in that company. You must trust in the financial management of the company as it can be very risky what the company does with the funds.

For example, by collecting the full payment of the packages up front, it would seem that the business is very profitable on a cash flow analysis basis. For accural basis, that will be very subjective. Further, it is unknown what the business owners will do with the sudden "profits".

A. They could declare it has high salaries to the "inner circle" of employees who are themselves and relations.
By so doing, when the company goes bankrupt, this expenses cannot be demanded back. It has already been considered spent as company expenses. Creditors can only persue the private limited company for what ever is remaining of company funds and liquidate assets.

B. They could use it to expand their businesses beyond their capability, taking on exceptionally high rental unnecessarily and driving business cost up within too short a time. If new customer growth does not yield the expected returns, the company will show signs of cracking and fold very soon.

C. They could invest the funds and this incurrs additional risk. Are they capable of prudently investing when it is not their key business to do so. They could engage external financial experts, but that will incurr more cost again. Leaving the funds just lying there is also not logical as the opportunity cost is too great.

In my opinion, pre-paid business structure is only beneficial to the company. It is not directly in the interest of the customer. Although the company provides steep discounts for pre-paid packages, it is because, the original pricing was grossly overpriced to begin with. If the discounts were geniune, it would be even more risky to take up the package as the company is suffering a loss.

Well, I am not a huge user of spa facilities but I do not think it is wise to pump thousands of dollars up front and slowly using up the package, subject to the company's "availability". Perhaps the industry could consider alternative methods to secure loyality. I am not an expert but maybe membership, loyality points or how about plain old fashion good service.