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Pre Paid Packages

>> Wednesday, September 14, 2011

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.

4 comments:

financialray September 14, 2011 at 10:13 AM  

I think they should just ban these pre paid packages.
Asking spas to buy insurance will just pass the cost to consumers.
Anyway, the authorities may perhaps believe if consumers can afford spa services, they probably can afford to pay more.
However, other service lines are learning to roll out serviced packages too. Many hair salons are now doing the same. If I remember correctly, a hairdresser who claimed to do hair for Nicole Kidman used the same service packages and now has defaulted on rentals.
Pre paid packages is one easy way to swindle customers. The authorities should not wait till some minister's wife get conned in a similar fashion before they take action. Otherwise, my barber shop will also soon offer pre paid packages.
I applaud CASE for standing up by writing in to forum. Let's hope it has more bite. The Chinese has a saying, kill the chicken and warn the monkey not to play tricks. If this chicken gets to run away, I am sure many monkeys are watching.

Lau September 15, 2011 at 10:27 AM  

I agree fr. Having insurance for packages is just adding a new problem to an existing problem while not really solving the root at all.

Next will be the insurer to lose money compensating all these failing companies. Then they charge higher premiums and the package price shoots up. Even higher than simple pay per use price without insurance.

financialray September 15, 2011 at 12:45 PM  

It is sad to read from the Straits Times forum that some law professor mentioned that CASE has no case. LOL.
After all, the TRUE Spa is apparently managed by a son of ex chief justice. So probably know the legal system better than the man in the street.
Well, if you read all the advice given by the "experts" now is do not buy pre paid packages. They say pay more if you have to.
Monkeys see and monkeys do.
We will see such packages proliferate and best advice is to open our eyes wide if the government cannot do anything for such loopholes.
Cannot imagine this is happening in Singapore.

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