Are You Pricing Yourself Out of Business?
What profit margin should you be looking or hoping for? It should be enough to keep you in business with a personal compensation package you are satisfied with.
A recent inquiry: “It would be best if you put out an article criticizing the industry for not asking for a monthly fee that is in line with the risks they take on as an alarm company. I just reviewed a contract sent to me for fire alarm monitoring via cell radio in New Jersey, and the company charges $55 per month including the radio fees. This is absurd, considering they need to pay the third-party central and the DMP/Securcomm radio fees. Don’t they realize they are working for no money and assuming tremendous risk?
“I’m also looking at a contract from an Orange County, N.Y., company that is changing $32 per month for monitoring with IP backup. These companies are nuts; don’t they value their time, labor and general overhead? They are making no money and will get far less when they sell the little they have. We should do a webinar on not being a putz in business!”
This topic is not as simple as this suggests. But it raises at least two issues: risk as a factor and overall profitability for providing monitoring (and perhaps other RMR services). Generally, I agree that pricing is on the low side (though that is not true for some alarm companies that have learned “the art of the deal” better than others or have honed their sales techniques). Lower pricing ends up filtering down to many companies not being able to pay employees, particularly techs, enough to keep them or attract new people to those trades.
First let’s discuss risk. Alarm companies face wide-ranging exposure for liability. Too many subscribers think of their alarm company as their insurance company in the sense that it’s the alarm that’s supposed to guard against burglary, fire, etc. The Standard Form Agreements (alarmcontracts.com) are designed to disabuse subscribers of that notion and give them the stark reality of the purpose and limits of the security or fire alarm systems. So, alarm companies who use these contracts are significantly reducing their risk; with E&O coverage the risk is minimized even more. Fortunately, the cost of E&O coverage is relatively inexpensive compared to other liability insurance coverage and the Standard Form Agreements play a major role protecting the insurance companies from exposure.
The other issue is profitability. There are two accepted popular ways of modeling the alarm business. One, put in alarm systems and make your profit margin on the installation. Two, put in alarm systems at or below your cost and hope to make a profit on the after-install RMR services, typically monitoring, repair service, inspection, and administration. As mentioned, some alarm companies manage to attain profitability on both the install and after-install services, and that is of course how it should be.
Monitoring has long been a service that has a higher and predictable profit margin. The monitoring costs are known and all the alarm dealer is doing is sending out invoices (and some don’t even do that). The spread on what’s invoiced and what the monitoring service actually costs, added to the invoicing cost, is the predictable gross profit (net profit would require figuring out your operating expenses, e.g. rent, trucks, employees, accountants and lawyers). RMR for other after-install services is less precise.
What profit margin should you be looking or hoping for? That is something I can’t answer quantitatively but I suggest it be enough to keep you in business with a personal compensation package you are satisfied with. The elephant in the room is, no matter what you’d look for or hope for, what you can charge customers is limited, constrained, or at least influenced by what your competition is charging. Sure, customers do have several criteria for choosing an alarm company, but for many the price is a deciding factor.
It’s one thing to double what your competitors charge and another to explain to the customer why, in your case, it’s justified and the customer should choose you. Some customers may not see beyond your competitor’s 2005 Ford van and your new Mercedes truck, thinking that may be the reason you are charging double.
I think the webinar that’s needed is how to go from the 2005 Ford van to the new Mercedes truck. Alarm companies should always be watching the bottom line and figuring out how to be more profitable.
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