Each year, Security Sales & Integration and Parks Associates partner to complete The Residential Market Report, a survey of electronic security dealers and installing security contractors.
Now in its fourth edition, the survey has multiple purposes. First, it provides current business metrics for security dealers. Because security dealers have participated in the survey for several years, trending is also available. By comparing multiple years, we can provide insight into changing business conditions.
In addition, the survey probes for security firms’ adoption and sale of products and devices at the edge of their core business, premises security systems. Again, this helps dealers know what their colleagues and competitors are doing, arming them with information important to compete effectively.
Finally, the survey can help identify areas of new interest or increased interest. A great example is the surge in IP cameras.
The Annual Residential Market Report fielded online responses between Aug. 18 and Sept. 25. This has proven to be another solid business year for security dealers, albeit not forecast by Parks Associates to be as robust as 2015 or 2014.
The latter experienced much higher than standard growth as the economy began its recovery and pent-up demand was clearly demonstrated in the market. With a net of nearly 2.8 million new security system sales (after attrition and replacement calculated) in 2014, the following year experienced strong but more normal net sales of about 2 million systems.
As this year nears its end, Parks Associates forecasts 2016 net sales slightly lower at close to 1.9 million systems. After several years of recovery, the remainder of the decade will bring a fight for targets and increasing needs for competitive differentiators.
Read on to see why embracing smart home technologies in particular will be a smart decision — 65% of survey respondents now include smart control features in installations — and how other factors such as labor rates and monitoring fees are shaping today’s security market and solutions.
Assessing the Security Landscape
Nearly 50% of this year’s SSI and Parks survey respondents are sole decision makers for their firms and firm owners while more than 80% are sole decision makers or managers who share in the decisions of what to offer and what not to offer.
Approximately one-quarter of respondents are from firms providing monitoring while a larger percentage — 62% — offer monitoring through a third party. Only 10% claim to offer no monitoring at all.
As ever, small firms dominate the security dealer landscape. About 50% report revenues less than $1 million while one-quarter report revenues exceeding $5 million. Small firms can act quickly in the face of competition or changing conditions, but also have disadvantages in certain areas.
For instance, credit lines are imperative, and decisions as what and whether to add new capabilities can be difficult due to risk and scarce resources in both people and money. Being first to adopt a “new” capability is often impossible or unwise.
However, so is being last to adopt new capabilities. This year shows that a majority — more than 60% of dealers — now offer some level of interactivity for their traditional systems.
The message for those dealers that haven’t yet adopted such capability: do that soon. Parks Associates estimates a total of 14,000-15,000 security dealers operate in the U.S.; many are small and serve local geographies.
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The top six types of systems sold by security dealers between 2013 and 2016 are reflected in the chart above, and note the percentage of security dealers selling IP cameras, CCTV, structured wiring and smart home devices has increased — the impact of the latter, in particular, was revealed as it jumped 8 percentage points from its initial listing in the survey last year.
The network security cameras category has risen from being offered by 62% of responding dealers in 2013 to 81% today. They are fast becoming table stakes. In addition to categories that are increasingly sold by security dealers, several have declined — some dramatically — over the same span.
“No new wires” networks shrunk from having 34% of dealers selling them in 2013 to only 21% today. Home computer networks dropped at the same rate. The percentage of security dealers selling and installing audio systems has dropped from 40% in 2013 to 30% in 2016, while home theater held steady with 25%-30% of dealers at least offering those installations.
Why Do Dealers Change Their Offerings?
There are myriad influences to this answer, but competitive forces are key. In addition, more homeowners are becoming aware of smart home options and asking for such capabilities.
For security dealers, smart home offerings can provide additional revenues, some with good margins. Interest in remote control and monitoring capabilities is especially keen, with 84% of survey respondents more aware of the technology and requesting it, which was 8 points higher than in 2015.
Solid margins, customer demand, competitive parity and new products all combine to increase product adoption in some areas, with opposite factors such as low margins and sated consumer demand causing the easing out of other categories.
IP cameras, in particular, have gained consumer awareness the past few years and are a natural enhancement to the concept of premises alarm systems.
Good News for the Majority
Nearly 60% of security dealers report revenues of 10% or higher in 2016 than in 2015. That follows the same level of increase reported for 2015 over 2014. Less than 10% report lower revenues than in previous years.
This positive response demonstrates some, if not strong, market recovery as well as a strengthened housing market.
While new construction is up for single-family homes, this year’s security dealer respondents report about the same mix of sales as last year in terms of existing versus new starts. About half of all sales are greenfield installations in existing homes, 20% into new starts, and the remainder are upgrades and additions for systems already installed in homes.
This mix has remained quite constant since 2014. Higher revenue may also reflect the addition of new offerings such as IP cameras and other smart home devices for many dealers.
Another testament to this revenue growth is the uptick in average installations per month. While small firms install fewer than the average, with a robust 55% of dealers reporting sales and installation of 1-10 systems per month, the overall average is up for the second year in a row.
Most impressive is the spike in dealers installing more than 50 systems per month — 10% of dealers reported that volume level in 2015 while 18% reported the same in 2016.
Monitoring fees are also up, on average, to $33 from $31, a 6% increase. That follows the same rise reported in 2015 for monitoring fees over average fees in 2014. Once inflation is factored in, these represent small but perhaps adequate increases, for this period.
As more obvious household market demographics are served, remaining markets will tighten. Pressure on monthly fees will also increase. It’s plain to see that a heightened and easily understandable value proposition is becoming ever more essential.
The network security cameras category has risen from being offered by 62% of responding dealers in 2013 to 81% today. They are fast becoming table stakes.
In response, dealers have choices, but not all of them are comfortable. Lower RMR is possible for some dealers but it lowers profit and lengthens the span of time to recover the subsidized costs of system equipment and installation. That is undesirable. Deciding to be a “value” security dealer; that is, offering highly competitive prices and only carrying basic system configurations, is also an option.
It is a good option for a portion of dealers, but certainly not for most as it limits opportunities for upgrades and high brand image. It also places high pressure to keep labor rates low in an environment where skilled labor is at a premium.
Additional options include expanding product portfolios to include emerging products/devices that enhance the security system itself, or expand the perception of what “security” means, or offer new benefits previously unavailable from security system dealers, or encompass a combination of these benefits.
The majority of security dealers are migrating to this capability expansion. The rate of migratory speed varies by individual firms’ current positions, financial strength, and target markets. The breadth of expansion is based upon many of the same considerations as well as a management assessment of whether the firm possesses the time, resources and expertise to determine which products/devices are worth adding to its business plan.
A solid portion of dealers had already expanded to offer home theater or audio systems. As mentioned, some are pulling back from those areas now as margins on equipment are low and at least most basic home theater systems require less labor skill than in years past. The percent-age of dealers offering entertainment systems is not increasing. In their stead now comes smart home devices and options.
Role of Smart Home Rises
About 70% of respondents offer smart home additions to their installations of traditional security systems. As mentioned, network security cameras are offered by most dealers, while other options such as smart lighting devices and smart thermostats are not as pervasive but also commonly offered.
The percentage of dealers offering these additional capabilities has increased every year for several years. Dealers reporting that they offer smart home adjacencies and cameras also report that approximately 35% of their installations include at least one of these related capabilities.
That percentage remained stable from 2015 to 2016. More common, and becoming another table stakes item, is smart control of the security system itself.
65% of dealers report providing interactive control for their systems through computers, tablets and smartphones. Their customers expect this benefit.
For the consumer, the most obvious and easily understandable additional device to a security system is a network security camera. These have improved greatly the past five years. Formerly clumsy, difficult to operate, and often delivering fuzzy pictures — all at a significant price — adoption was low and slow.
Today, prices have declined, cameras have improved, and smartphones and computers allow the consumer to retrieve or receive images in a familiar manner.
Growth of sales in IP cameras is strong across both retail and professional installation channels. Integrating the images and assessing the alert requirements is an area where professional installers can be a great help to consumers, and adds to the allure of smart home integration and remote capabilities.
That professional assistance is a competitive differentiator for security dealers. While the highest growth area for a device, network security cameras are not the only category realizing higher adoption in the security dealer channel.
Second to network video cameras in smart home technology installed within security systems, connected lighting controls is growing stronger. This is the first year SSI and Parks Associates have asked about smart garage door remotes or voice rec-ognition, but these too are now showing up although not in big numbers.
Of interest is that when asked which products dealers desire most from their interactive security providers, the responses are smart door locks, IP cameras and smart thermostats, in that order.
Voice of the Next Generation?
The next wave, building now, is for voice recognition as a way to interface to all of these products and systems.
Amazon’s Echo is a catalyst to smart device adoption as it presents an easy way to control and access devices, and this was evident in the number of companies highlighting Amazon Alexa voice integration during the recent residential technology CEDIA tradeshow.
Echo or competitor voice recognition systems will be added to or integrated with leading security systems. Vivint and ADT are two national dealers already offering voice interface. The best news for this addition is that effective voice recognition that eases the user interface for consumers offers another boost to adoption of many systems and devices, from smart home to security systems and beyond.
The next year to two years will bring faster adoption for key smart products and voice recognition. Deciding which devices to offer and which to decline is a difficult but essential task for security dealers.
Parks Associates views deciding to offer voice control as not even a “yes/ no” question but a “when” proposition. Once that capability is established, with consumers aware they can obtain reliable voice control for their systems and devices, it will become a benefit they want.
If one provider has reliable voice recognition and another provider does not, the consumer will usually choose the provider with that support. Security dealers must stay on top of this wave as today’s smart home capabilities continue
Tricia Parks is the CEO of Dallas-based research firm Parks Associates. She can be contacted at [email protected] or (972) 490-1113.