Every day your employees have the opportunity to touch customers in ways that impact whether that customer decides to call you again, buy from you again, or cancel and run away with your competitor. The state of today's economy has caused many financial institutions to significantly tighten lending policies. Although many financial institutions are still eager to loan money to the alarm industry, there are a number of us who may not fully comprehend the cost and consequences associated with customer attrition.
TRG Associates, in conjunction with the Central Station Alarm Association (CSAA) continues to accumulate attrition results in their annual report from a growing number of small to large national security companies. The study seeks to provide a measurement of the attrition results across the marketplace as to the level of customer recurring monthly revenue (RMR) losses (gross attrition) and the offsets to those losses through resigns of like customers/locations and other increases in the RMR related to the same base of customers (net attrition). The 2008 report includes results for over $123 million of RMR from companies across the U.S., Canada and Europe.
The decreasing trend in gross attrition over the last three years through 2007 was reversed in 2008 as a result of the economic downturn. According to the study, which provided an overview of 2008 results, the average residential/commercial gross attrition figure increased to 11.29 percent from 10.83 percent in 2007 while the average net attrition figure increased from 8.15 percent to 8.59 percent.
"I think the industry experienced the worst of the impact of the recession late in 2008 and early into 2009," said John Brady, president of TRG Associates. "Based on the results we've seen, attrition stabilized, especially on the residential side. I expect that we will see attrition go down, or hold steady, but certainly not increase."
Two areas most impacted by the recession are the residential and commercial communities, according to Brady.
"On the residential side, the foreclosures and lack of building dramatically impacted everybody," continued Brady. "On the commercial side, it's more so the empty space and increase in open leases and open leased space that impacted the security industry."
Still, Brady predicted that based on the many companies TRG Associates works with, the worst is behind them regarding the negative impact the recession has left of their businesses. "For most of the guys we work with, they're seeing that the backlog of installation volume is beginning to pick up, which would suggest that they're going to have more to work on the books this year than they did in 2009," he explained. "Certainly, the fourth quarter did not see a decrease in their backlog as they experienced in the first, second and third quarter of 2009. The backlog is beginning to strengthen, at least on the residential side. On the commercial side, it is also strengthening but that's because it never declined as badly as the residential side of the business."
For systems integrator Security Networks, it is about using the right measures on a daily basis to keep attrition as low as possible.
"For us, attrition has held steady and has not gone up as we had feared it might," said Rich Perry, president and chief executive officer of Security Networks, based in West Palm Beach, Fla. "If a customer has a financial hardship, we'll lower their monthly rate before we lose them as a customer, and that can sometimes help because a lot of these folks don't really want to lose security unless they're moving out of their house. In some cases, we will do that to help them."
The financial community is well aware that the median cost of replacing just one dollar of lost RMR is approximately $33 or more in our industry. In other words, every customer lost costs about a 33 times multiple to replace. Money lending institutions are also well aware of the fact that with very few exceptions, revenue does not equal profit. When we look at RMR as the end-all beat-all gauge of our company's financial health, we are often forgetting to take a hard look at the direct out-of-pocket cost associated with acquiring that revenue.