Attrition is a key metric in the security industry. It directly impacts a company’s health, profitability, and the ultimate value of its accounts in an acquisition.
Attrition is also one of the most misunderstood concepts in the alarm industry. Many security company owners are shocked to learn that their attrition rate is much higher than they estimate – in part because they don’t know the essentials of attrition: how to calculate an accurate attrition rate, the important difference between gross and net attrition, and what these rates really mean in terms of revenue and account value in an eventual sale.
In its recent whitepaper, “Attrition: Do I Have a Problem?” at http://partner.alarmcapital.com/Attrition-The-Silent-Killer.html, Alarm Capital Alliance explains the fundamentals of this key concept and offers three key strategies for combating attrition:
1.Understanding and addressing the reasons your customers are cancelling;
2.Focusing on the customer experience as an antidote to attrition; and
3.Using a best-in-class sales program to minimize attrition from the start.
Attrition: The Essentials
Both gross attrition and net attrition are important, yet different metrics. Gross attrition measures the percentage of accounts that cancel — either outright or that are 90-days past due — over a period of time (usually the trailing year) divided by the average number of accounts the company owned over the same period. Net attrition adds back those accounts that a company has gained over the course of the year that replace those that have cancelled. New installations are considered growth and do not offset gross attrition.
For potential buyers, gross attrition is the more critical metric, because it measures the actual number of accounts your company has lost over the course of a year. It reflects the stability of your account base and provides a basis for potential buyers to predict the loss of RMR they are likely to suffer each year after purchasing your accounts. Companies with attrition rates at or below industry standards — 12 percent gross attrition — have more value in their accounts. They not only have more qualified RMR, but also typically receive a higher multiple for their accounts. Companies with a healthy attrition rate may also have a lower holdback amount in an acquisition, which is the specified amount withheld from the initial funding for a period of time to cover the losses from the company’s attrition in that same time period.
Tracking attrition regularly makes good business sense. After all, generating new customers costs more money than retaining existing customers, so a company’s attrition rate directly impacts its bottom line.
Why are your Customers Cancelling?
The first step to understanding attrition is capturing cancellation data using a uniform set of standardized codes or descriptions for cancellation reasons. Actively asking for information from customers at cancellation and keeping detailed account records for each customer through the entire lifecycle of the customer relationship also helps to identify the “real” causes of your cancellations.
To effectively drive down attrition, a company’s strategies must address the underlying reasons for cancellation. Just because some attrition is “ordinary” and unavoidable does not mean that a company can ignore it. Armed with accurate information about attrition, companies can develop practices to help minimize account aging and loss.
Cancellation due to company-related reasons can be addressed through changes in company policies and procedures. Cancellation for reasons outside of a company’s control — such as competitor-driven, customer relocation, system non-use or non-payment — can be addressed by implementing programs and practices specific to these types of cancellations. Employees should be given the tools and authority to address different cancellation reasons before the cancellation occurs.
The Customer Experience as an Antidote to Attrition
Retaining existing customers costs less than obtaining new ones to replace those lost through cancellation or account aging. Furthermore, the longer a customer stays with a company, the more profitable the relationship becomes, as loyal customers are more likely to be referral sources.
Providing an excellent customer experience — giving customers exactly what they were promised in a way that makes them feels valued and respected — can help minimize attrition. All employees, regardless of role, are brand ambassadors for their company, and every interaction — whether over the phone, online, by email, regular mail or in person — presents another opportunity to earn customer loyalty.
Documenting the reasons why customers cancel is important, but knowing how customers truly feel about their experiences is invaluable in preventing cancellations before they happen. Some ways to gather this important information from customers can include: brief survey questions at the end of a call, random surveys of your customer base and monitoring social media.
As hard as it may be to maintain this positive mindset in the face of unhappy customers and product or service problems, complaints also provide a wealth of information, not only about specific customers’ problems, but also about company-wide issues, customers’ wants and needs, and how to improve products and services. Of course, all of this information is worthless if a company does not actually do something with it. Companies need to employ the customer feedback loop — collect - acknowledge - evaluate - act - communicate — to make changes to address issues and combat attrition.
Prevent Attrition from the Start with Sales Practices
Minimizing customer cancellations requires effort at every stage of the customer lifecycle, and that begins with the sales process. Better sales techniques — those that focus on identifying and selling to well-prepared prospects who are looking to purchase a system and who are able to make an informed buying decision — yield a more stable customer base.
Before putting any sales program in place, however, a company must determine its business objectives, beyond getting more customers and increasing RMR. It must identify its brand promise, the kinds of customers that best fit its service model, and the market challenges it needs to overcome to build a profitable alarm company. Only then can you build the sales program.
A successful sales program starts with a great sales team. Regular training and continual education are critical for optimal sales results and business performance. Sales success also requires standard sales procedures and processes, including appropriate and effective selling methods, as well as established personnel policies and a code of conduct to guide the sales team.
One of the keys to attracting “sticky” or loyal customers is focusing a sales program on the customer, rather than on the contract or the sale. Customers who are aligned with a company’s core products and service offerings are key to a stable account base.
Implementing the Strategies
Once companies understand what attrition is and how to calculate, manage and prevent it, they are armed with the information and tools to build a profitable alarm company — one that retains and generates new RMR that will grow their business exponentially, increase profitability and build value in their accounts. To learn more about these strategies, download the full ACA whitepaper, “Attrition: Do I Have a Problem?” at http://partner.alarmcapital.com/Attrition-The-Silent-Killer.html.
Amy Kothari is President and CEO of Alarm Capital Alliance. To request more info about the company, please visit www.securityinfowatch.com/10746349.