The changing face of mass marketing

Tuesday, July 1, 2003

I have been active in the alarm industry since 1985 and I can vividly remember when alarm retailers began offering $99 alarm systems.
This came about in my hometown of Houston around 1989. The offering perplexed me. My company’s average residential retrofit alarm system cost more than $2,000. I couldn’t help but think, “Why are they selling alarm systems so cheap?” Back in those days, alarm dealers made so much money on installations, monitoring income was an afterthought. The concept of mass recurring revenue had not sunken in with the average alarm dealer. Oh, how times have changed!

Whether you love or hate mass marketers, one thing is for sure: their aggressive marketing has raised awareness of the need for alarm systems. During the 1990s mass marketing revolutionized the residential and small commercial alarm industry. The new modus operandi for alarm dealers nationwide was to offer potential customers low down payment, or nothing down, alarm systems to build mass recurring revenue.

In this model, the customer got into the security system at a very low cost, but paid a higher-than-average monthly monitoring rate. In essence, the customer financed the cost of the security system over time.

The alarm dealers that could afford to take on the debt associated with this business model were more than happy to do so to build the revenue base.

In a scenario with monthly recurring revenue amounts north of $30, there is substantial profit remaining to service the debt. In fact, many companies were enjoying 80 percent profit margins on their average monthly monitored account. This business model triggered the inception of the “authorized alarm dealer program.”

It made sense for larger companies to recruit smaller alarm dealers to grow their own account bases.

Many large alarm companies designed business models based on the average customer staying on for seven or eight years at $30-plus per month in monitoring revenue. Because of the ultra-high profit associated with the account, it made sense to pay more than 30 times the monthly monitoring rate to the authorized dealer for the account.

As any mathematician can attest, the problem with models is solving for the unknown. In this case, the unknown, or X factors so to speak, were a wide array of unforeseen variables that triggered account attrition. These X factors came back to haunt and, in some cases, bury, many authorized alarm dealer programs.

In some cases the X factor was a crooked alarm dealer selling the same accounts to multiple dealer programs. In other cases, the X factor was the failure to provide acceptable service to the customer.

By the end of the 1990s, there were so many X factors identified, authorized alarm dealer programs were forced to constantly evolve to address the mounting threats to their account bases. Account attrition is the mortal enemy of mass marketers and, in this debt-laden model, account attrition thresholds are slim, to say the least. The high-profit driven model works great when attrition is 10 percent, or below, but when attrition levels go north of 20 percent, the model fails. In this scenario, the cancellation rate wipes out the high profit required to service the debt.

The current decade has seen one authorized dealer program after another fall by the wayside. It is no wonder the programs left standing have tightened restrictions for buying accounts.

In the world of perceived value, how much value do you think the average person places on any commodity that is offered to them for free? A typical customer making $40,000 per year tends to prioritize monthly expenses. First on the list is the mortgage - people have to have a place to sleep. Next is the car. Way down the list is the alarm monitoring for the free alarm system. I can assure you there have been many instances where customers debated keeping the monitoring, or adding the sports package to their cable TV. In the end, the customer got to see their favorite football team play on Sunday and the alarm dealer lost an account. That is the reality of perceived value.

I feel there is currently a pendulum swing taking place in the alarm industry. From what I can see, alarm dealers seem to focusing more on customer service. Certainly, mass marketers have warmed up to the reality that good customer service is absolutely necessary to maximize account retention.

If nothing else, it seems as though we are learning from our mistakes. The advent of the authorized alarm dealer program attracted unscrupulous alarm dealers like flies to a rib roast.

Whenever you propose to hand over a $1,000 bill for a signed piece of paper, you are going to invite corruption. The net effect of all the corruption and numerous X factors that bred high attrition is that buyers now offer much lower multiples to buy accounts.

Once again, because so many X factors have been identified, buyers are hedging their risk by paying less for acquired accounts, especially on bulk acquisitions. As recently as three years ago, alarm dealers with a thousand monitored accounts who wanted to sell could command multiples in the high 30s. Today, they are now regretfully settling for multiples around the mid-20s.

So what is in store for tomorrow?

I am constantly being asked by alarm dealers, “What’s in store for tomorrow?” I do not have a crystal ball, but my instincts tell me the pendulum will continue to swing. Mass marketing will always be a part of the industry, but I feel the face of mass marketing will change.

Look for zero-down alarm system installations to be phased out. Because of the tightening restrictions in alarm dealer programs, I feel more dealers will seek alternative funding sources to keep their accounts and to build their own equity.

The recent purchases of thousands of alarm companies nationwide has left a void in the alarm industry. I definitely see traditional “carriage trade” alarm dealers filling that void.

The alarm dealers that can provide superior customer service will thrive. There has never been a better opportunity for the independent alarm dealer than right now.

In the final analysis, I feel mass marketing will target and produce higher quality customers. I also see authorized alarm dealer programs only inviting the best of the best dealers to sell them accounts.

In addition, I see many authorized alarm dealer programs forsaking explosive growth for more controlled growth that includes higher quality customers. Whatever happens, you can rest assured mass marketing will play a big role in the alarm industry’s future.

Mark Matlock is vice president of sales and marketing for United Central Control. He can be reached at