News Lessons Learned Opinion
Pay close attention to account attrition

It seems today that buyers of alarm companies are paying more attention to a whole list of different factors when assessing an alarm account base, but not as much to two very important markers: the annual attrition rate on the account base and whether the owner is replacing their cancelled accounts.

Based on my experience over the last few years, valuations seem to depend more on the size of the account base (the larger the base, the higher the multiple), the average rate on the accounts (higher rated accounts attract higher valuations), the type of panels installed (newer is better) and how the accounts are billed (buyers like pre-authorized payments better than invoices).

These factors are no doubt important but so are the attrition rate and whether the owner is able to replace attrition.

Let’s look at attrition first. TRG Associates, a U.S. consulting firm with perhaps the most experience on attrition, calls attrition the best barometer an owner can have on how well they are managing their account base. Well managed companies have low attrition rates.

To give readers some targets on attrition, here is what I think different sized companies ought to target for attrition. Larger blocks of accounts tend to have higher rates of attrition.

• For companies with under 500 accounts, five per cent annual attrition is a good target. Really well-run businesses can have attrition rates of three or four per cent.
• Between 500-1,000 accounts, six per cent annual attrition is a reasonable target.
• Between 1,000-2,500 accounts, try to stay under eight per cent annual attrition.
• Large national companies with more than 100,000 accounts can expect to have an attrition rate of 10 per cent.

Tips to establish and maintain a low attrition rate

• Service your account base well. This is critical. Don’t take two weeks to handle a service call. Make sure each of your accounts has up-to-date technology.
• Track your attrition rate annually (at the very least) and know why accounts are leaving.
• Don’t raise the monitoring rate on your accounts too high. $60/month accounts are likely to get knocked off by another dealer offering lower rates.
• Don’t move the accounts from station to station several times over a short period.
• Charge an install fee when you set the account up. Free accounts cancel more often.
• Try to get your accounts on pre-authorized payment whenever possible.
• Make your accounts “stickier” by adding cell and/or interactive service.
• Know that accounts generated from dealer programs will almost always have higher attrition rates than organically generated accounts.
• Stay away from buying accounts generated from high volume door-knocking dealers. They almost always produce accounts with high attrition rates.
• Pay attention to “moves” in your account base and try to hold onto your customer when they move.

Many dealers I talk to don’t track their attrition at all. Most of the time these same dealers are spending good money to set up new accounts. Why they would not want to see what happened to that money beats me. I would have a report prepared once per month with all the cancelled accounts showing the reason why. This is just part of running a good alarm business.

Having a plan in place to replace your lost accounts is equally important. In today’s market, where new alarm accounts are usually put in at a loss, this is tough for a small independent dealer to handle financially.

Most of the smaller dealers today have gravitated to doing more camera and small access jobs which are more in demand and make them more money. For these dealers, making sure to hang on to accounts becomes even more important, mainly because alarm accounts will likely be the major item of value when the dealer sells.

For mid- sized dealers — 2,500 accounts or more — it pays to look for small acquisitions. But don’t buy accounts with old panels and, most importantly, pay attention to integrating them into your systems properly. As for the large national players, replacing lost accounts often demands all three methods of acquiring new accounts: organic growth, an effective dealer program and constantly looking for good tuck-in acquisitions.

Almost every major player in Canada I have talked to over the last decade or so has told me that they had to do tuck-in acquisitions in order to maintain their account base.

There are many factors to pay attention to in order to maximize the value of your alarm accounts when you sell. Just don’t lose sight of maintaining a low attrition rate and having a plan in place to replace attrition.