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Contending With Cutthroat Competition

We all know that the alarm business is extremely competitive. Unlike home improvement contractors that can get away with 100-percent markups, alarm companies often install alarm systems for cost, below cost or for free.



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We all know that the alarm business is extremely competitive. Unlike home improvement contractors that can get away with 100-percent markups, alarm companies often install alarm systems for cost, below cost or for free. Relying on recurring revenue from the monitoring contract, alarm companies hope to realize a profit over the long run. Additionally, alarm contracts sell like negotiable instruments at multiples ranging from 15 to in excess of 40 times the monthly revenue, so an alarm contract with recurring revenue has immediate value or equity for the alarm company.
 
Although not the only avenue for recurring revenue, the monitoring contract may be the most popular. Even those throwback dinosaurs that don’t use contracts know they need monitoring contracts and usually get them. Most dealers don’t have their own central stations and subcontract the monitoring to a wholesale central station. The dealer tries to charge between $16 and $30 a month, while paying the central station from $2 to $6 or more, depending on the monitoring services provided. (I am referring to intrusion systems — expect to pay much more to the central station for fire monitoring, and you will be charging more for that service. CCTV supervised monitoring is also priced higher.)

Everyone knows that price fixing in an industry violates all kinds of laws, and it’s not done in the alarm industry. This is not because you guys wouldn’t like to try and get away with it, but because this industry is so competitive it just isn’t feasible. Yet there are a few taboos, even in this industry.

Wholesale central stations come in two forms. Some monitor only for the trade, others monitor for themselves and the trade. Dealers generally know whether their central also happens to be one of their competitors, and there is nothing wrong with that relationship.

But a central station that also happens to be a dealer (installing, servicing and monitoring for subscribers directly) will generally be smart enough to treat its wholesale central station and its dealer operation separately. The dealer side will pay for monitoring just like any other dealer. More importantly, the central station will not offer wholesale pricing to the subscribers directly. Thus the dealer will be competitive with other dealers. There would be little likelihood of other dealers supporting the wholesale central station if the dealer side was able to compete unfairly or the central station competed unfairly.

To illustrate how competitive monitoring can get and to quickly dispel any notion of the unfair trade practice of fixing prices, the Georgia market is upside-down over local competition. Although rumors are spreading faster than Grant went through Richmond, no wholesale central station offers direct monitoring to subscribers. One central station that monitors its own subscribers only (so I don’t classify it as a wholesale provider) offers those services for $4.95. It’s not a secret. In fact the domain name for the company is 495alarm.com. If they can make a profit charging that price, well good for them. It’s the American way.

Rumors that a wholesale central station is offering what the trade would consider pricing that is too cheap is apparently not true, at least not in Georgia.

While it may seem to some that cut-rate prices are inherently unfair, there is really nothing wrong with competition as long as it’s on a level playing field. An alarm dealer that wants to operate its own central station and offer monitoring for basically wholesale prices is free to do so. How the economics work out is another matter, but not really the business of that company’s competitors.          
 
Ken Kirschenbaum is a partner with his daughter, Jennifer, in the law firm Kirschenbaum & Kirschenbaum.

The opinions expressed in this column are not necessarily those of SSI, and the content is informational and not legal advice.


Article Topics
Business Management · Legal Briefing · Price Fixing · recurring revenue · All Topics

About the Author
Ken Kirschenbaum
Security Sales & Integration’s “Legal Briefing” columnist Ken Kirschenbaum has been a recognized counsel to the alarm industry for 35 years and is principal of Kirschenbaum & Kirschenbaum, P.C. His team of attorneys, which includes daughter Jennifer, specialize in transactional, defense litigation, regulatory compliance and collection matters.
Contact Ken Kirschenbaum: ken@kirschenbaumesq.com
View More by Ken Kirschenbaum
Legal Briefing, Price Fixing, recurring revenue


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