As more integrators move into recurring revenue services, they must learn to retain their accounts and to measure the “stickiness” of their services. Account cancellations represent an integration company’s account attrition rate—a metric that has long been a benchmark statistic in the security industry and can easily apply to an integrator’s service contracts, network monitoring services and other recurring services.
Stemming account attrition has been an ongoing concern in the security industry for many years. So what exactly is an acceptable gross attrition rate? According to Victor Harding of Harding Security Services Inc. in Toronto, anything under 7 percent is considered acceptable, but he suggests smaller companies should be able to maintain a gross attrition rate lower than 6 percent.
“A company’s attrition rate is one of the top two or three parameters that every alarm company should be on top of and measuring at least quarterly,” he says in a letter to Ken Kirschenbaum of Kirschenbaum & Kirschenbaum, a leading security legal expert. Harding adds that integrators should look at account attrition over a long term three- to five-year period also, not just monthly or quarterly.
Attrition is one of the key metrics that potential buyers look at when analyzing an integration company to purchase accounts. Thus, integrators need to understand the difference between gross attrition and net attrition. Gross attrition is simply the percentage of accounts that cancel. Net attrition takes into consideration a relocating homeowner that “resigns” his or her account and then signs a new contract at their new home. Net attrition should run a few percentage points below gross attrition.
“As ‘moves’ are consistently one of the biggest—if not the biggest reason for attrition—all alarm companies should have policies and procedures in place for moves,” adds Harding. “Attrition is an issue that most of us do not spend enough time on.”
Secret to 1% Attrition
At Finest Security Services in West Hempstead, N.Y., owner Robert Manuella has found a secret to keep his attrition rate below 1 percent, while at the same time increasing customer satisfaction… he keeps his monthly alarm monitoring rate well below his competition.
Currently, the average monthly residential alarm monitoring rate is $26 per month. Finest Security maintains all its residential clients’ monitoring rates at between $15 and $22 per month with no increases during the life of the contract. Clients must pay in advance and are billed on an annual or semi-annual basis.
“All customers have a breaking point during hard times. The key to keeping them paying is knowing the point of break,” says Manuella. “This is the $15 to $22 per month bill. The customer will pay this bill because they see this bill as ‘ONLY $15 PER MONTH.” This goes a long way with a customer, [and it is the difference between] putting your bill in trash versus paying it.”
For Finest Security, the results have been great. The company maintains an account attrition rate below 1 percent and higher customer satisfaction.
Is Account Attrition a Meaningless Stat?
As recurring revenue expands to include cameras, storage and other services, some industry pundits argue that “account attrition” is no longer a telling piece of data. Rather, they believe integrators should be simply calculating the loss of recurring revenue itself and not individual accounts.
The argument makes some sense. For example, if you have 100 recurring revenue accounts with 99 of them paying $35 per month and one of them paying $250 per month, it adds up to $3,715 per month. If one that single high-paying account cancels, it equals a 1 percent total attrition rate. But in terms of total recurring revenue, it represents a loss of 7 percent.
Which metric is more telling? You could argue both. The account attrition rate is more indicative of the general trend of being able to keep accounts, while the recurring loss is certainly more important for managing internal cash flow.
Jason Knott is the Editor of SSI‘s sister publication, CEPro. He has covered low-voltage electronics as an editor since 1990. He joined EH Publishing in 2000, and before that served as publisher and editor of Security Sales, a leading magazine for the security industry.