Pre-Paid Struggling to Keep Customers

Pre-Paid Legal Services (PPD Quote) broke its New Year's resolution.

The company's plans to improve customer retention have panned out about as well as a doomed fad diet. A year after promising better retention -- and sacrificing some growth in the process -- Pre-Paid is losing more customers than ever. For the second year in a row, the company has ended the fourth quarter with fewer customers than it started with.

Even after adding 153,501 customers, including a few thousand buyers of "identity theft shields," Pre-Paid finished the quarter nearly 2,000 customers short of where it started. A year ago, when its business started shrinking, Pre-Paid saw its stock slide 25% even as it rushed to reassure the market that the slowdown was temporary -- and even self-inflicted -- in nature.

"We continue to implement programs that we believe will improve future retention rates and took specific steps during the fourth quarter of 2002 to increase the focus of our sales force on membership retention," Pre-Paid CEO Harland Stonecipher announced last year. "These actions naturally reduced the number of new memberships written and new associates enrolled during the quarter but demonstrate our commitment to improve membership retention."

But good intentions hardly guarantee success, as many a resolution-breaker knows. Today, Pre-Paid is still struggling to keep old customers even it fights for the flood of replacement customers that it once took for granted. Five years ago, Pre-Paid was losing just over half as many customers as it was adding. But that cushion, which allowed the company's business to explode, has thinned to almost nothing in recent years. By 2003, the company was losing 95% as many customers as it was signing up. And the picture could get uglier.

Pre-Paid refuses to comment for stories by TheStreet.com because it believes the coverage is biased. But short-sellers were quick to declare the latest period a "disaster," particularly regarding customer attrition.