Selling Service Agreements & Other Recurring Revenue Options Jason Knott, CE Pro.

transcript

Selling Service Agreements & Other Recurring Revenue Options

Jason Knott, CE Pro

Agenda

• Review 15 different ways to earn recurring monthly revenue (RMR)… not just alarms.. using “Success Stories” from actual CE pros

• Focus on Service Agreements• Sample 2-tier Service Plan, Sample Service

Contract (alarmcontracts.com)

Industry BenchmarksSmall ESCs4.1% Median Operating Profit19.6% Median Discretionary Profit (including owner’s compensation)Larger ESCs2.4% Median Operating Profit 11.8% Median Discretionary Profit – (including owner’s compensation)

• Median Revenue Per Employee = $135,000• Median Gross Profit Per Employee = $48,740• 85% Provide “Fixed Fee” Pricing; 15% T&M• Targets: 50% gross margin on equipment & 50% gross margin on

labor – Steve Firszt, Fast Forward Business Coaching

Source: CEDIA 2012 Benchmarking Study

Sound familiar?

RMR Data

• 25% of integrators = $0 in RMR• Among CE pros who do offer RMR, it averages

8% of revenues • Service contracts – 58% of dealers offer• Alarms – 49%• Home health – 11%

Why CE pros Do Not Offer RMR?

• Lack of sales and service structure to sell recurring revenue

• It just does not fit their business model/plan• They are worried about liability and licensing issues

related to security and aging-in-place systems• They worry about collections issues• Fear that subsidized installations will put further

price pressure on the non-subsidized portion of their business, such as audio and video

WHY Profit and Recurring Revenue Are Important

• Cash Flow

• Differentiation & Positioning

• Upselling Opportunity to Existing Customers

• Higher Customer Satisfaction

• Increased Company Valuation

Calculating Increased Value“Recurring revenue is important because it represents almost the

entire value of your business.”– John Mack, Imperial Capital

Example 1 : • 500 security accounts @ $30/month each = $15,000/month• At sale of your company @ 25x – 50x monthly revenue = $375,000 to $750,000 payout• Current multiple being paid is about 35X with variances based on # of accounts, consistency of equipment, etc.

Example 2:• 500 Warranty service contracts @ $8/month each = $4,000/month• At sale, @ 12x monthly revenue = $48,000 payout

Recurring Revenue Model• Avg. Residential Monitoring Fee = $23/month

• Typical 3rd Party Central Station Residential Monitoring Fee = $6/month (some advertise as little as $1.50/month dealer cost)

• Dealer Profit per Account = $17/monthSource: Security Sales & Integration

Other Security Monitoring Add-ons• Latchkey Kid Notification = $5 to $7/month (with a monthly Open/Close

Report)• Backup Transmission/Line-Cut Protection = $16/month (long-range radio

or cellular)• Annual Inspection/Equipment Warranty = 6% of total system cost• IP Camera Remote Image Storage = $20-$25 per camera/month (12% of

all video surveillance cameras are now installed residentially)• Medical Alert = $28/month• Patrol = $50/month• Access Control (MDUs) = $5 per door/month?• Deadbolt Monitoring = $12.95/month (Schlage, B&D)

Bottom Line… $50/month is not unrealistic for monitoring a residential security account!

Alarm Monitoring Success StoryAmerican Alarm, Arlington, MA2009 vs. 2102• 2012: $865K/RMR; 16,000 accts.; 159

employees ($159K/emp.); $24.5M rev.

• 2009: New installs down 30%• 2009: Revenue down $2M• 2009: 17,000 accts.; $800,000/RMR;

$23M rev.; • 140 employees ($165K/emp.)

Recurring revenue helps sustain a company during market fluctuations. They have lost 1,000 accounts in 3 years but increased RMR by $1.5M.

Ankle Bracelet Monitoring Success Story

Moon Security, Pasco/Kirkland, WA• Ankle Bracelet Monitoring for

Alcohol/House ArrestTook over monitoring from City

• Recurring Daily Revenue - Client pays daily rate of $17 - $18 per day

• From $8K-$12K/month to $100K-$200K/month

• Saving city $250K/month• iSecureTrac

Photo fabrication

Entry Level Home Automation Success Story

• Vivint -- sold for $2 Billion last year• 673,000 accounts #3 on SDM 100; #3 on CE Pro 100• $130 million in residential installation revenue in 2012• Sells 3 Home Automation Packages • 2008 =$9.9M in RMR; 2012 = $27.8M in RMR• Total revenues = $397M in 2012• Subsidized installation with 2-year breakeven• Avg. alarm client keeps same monitoring company 11 years• Boosted RMR by adding solar, pet monitoring, tornado warnings

and home automation

Entry-Level Home Automation Success Story

SimpTech SolutionsFlorence, KY• Before: 6-men, $20K-$25K avg. job• Now: 2-man shop = $8K-$10K range • Using 2Gig Go!Control panel• $2500 security installs, $60/month monitoring

via Alarm.com

DIY Security Success StoryFront Point Security McLean, Va.• 3 “Easy Install” options – self install by client• $35 to $50/month monitoring• $100 to buy system with 3-year monitoring deal• $375 to buy system with one-year contract• Cameras sold separately for $180-$400; Z-wave

lighting modules = $50/each; keypads = $80; touchscreen = $140

• Typical upsell = $200 to $350 per client

Cellular Conversion Success Story

Craig Metzger,GuardMe Security,Old Bridge, NJ

Before: Earned $23/month for alarm monitoring only

Now: Earns $34.95/month for alarm monitoring + $32.95/month for IP cameras using Honeywell Total Connect = Earns $67.90 per month (most of it profit minus 3rd party monitoring costs)--Also converting commercial accounts

Fire Extinguisher Monitoring Success Story

Select SecurityLancaster, Pa. Fire extinguishers need to be inspected

Bought a fire extinguisher company and converting them to monthly contracts vs. billing clients after every inspection… all about cash flow!

Remote IP Video Surveillance Storage

ASG SecurityBeltsville, Md.

•Hosting IP video – no DVR on-site•“Fresh and exciting. We have it all to ourselves” •Produces RMR from CCTV on a per-camera basis – routinely $20 to $25 per month per camera, according to Axis Communications•To ease bandwidth concerns: H.264 compression – 3 frames per second transmission•Onsite – recording done to HD storage DVR at 30 frames per second if client wants it.

Success Story: Concierge ServiceConcierge Direct, New York City• Created full concierge service

(dog walking, restaurant reservations, dry cleaning, personal shopping, etc.)

• Started with The Plaza• $25/door just for the right to

access the service + the cost of the service with a mark-up

• www.cdi247.com

SimplyHomeNorth Carolina • Since 2003• Apts./condos housing

people with disabilities• On-call staff are notified

via text, email, phone calls, and a speaker in their office of various events throughout a complex

Home Health Business Model

PERS Success Story

Select Security, Lancaster, Pa.

SelectCompanion

•Wireless home health wristband

•No monthly contract

•$0 installation cost

•$39.95/month

Digital Music Success Story

Jamieson’’s AV – Toledo, Ohio • Earns recurring revenue by

creating a subscription service whereby monthly Sonos clients gets list of cool new Internet radio stations to add to their systems

Calibration Success Story

• Acoustics engineering and video calibration• Plasma and LCD panels, Direct view (tube) TVs, and

computer monitors: $300 • Rear projection TVs (DLP, LCD & LCOS): $300• Projectors (DLP, LCD & LCOS): $350• Rear projection (CRT), and Projectors (CRT): Call for quote

Don’t Hide It… Put it Up on Your Website!

Richardson, Texas

Residential Sprinklers• Sept. 2008 ICC – Sprinklers in all new homes and townhouses

(Code RB64)• To take effect in 2009 as part of new International Residential

Code (IRC)• IRC used by 46 states• FYI: adds $2-$12 per square ft. (builder cost)• Opportunity?

– Integrate with alarms and security alerts– Team with local fire-protection services– Additional monitoring fees for entry/exit reports, waterflow device

activation, email/cell phone alerts, wet systems water backup signals, etc.

VoIP Phone Service• Only 38% of integrators install digital phone systems• OnSIP – Partnered with Panasonic (80% marketshare)• Up to 20% of monthly phone service fee to the

integrator • ‘Flat pay’ program (not based on individual seats) =

$50/month, so integrator gets $10/month• No long-term contract signed by client, month to

month• Sales technique “Don’t you want to get rid of

Verizon?” Everyone loves to hate the phone company• Less upfront revenue -- $100/phone vs. $50,000

installation but opens up digital phone installation market to new clients who may not have bought a more expensive option

Service Agreement Data

• 59% of integrators offer Service Agreements• 17% of clients actually buy Service

Agreements• 85% of service calls are not covered by a

service agreement• 69% of integrators say they earn a profit on

their service• 8% of service calls are handled remotely

Service Department Profile

2 -- Median number of technicians per company that handle service (dedicated and non-dedicated)

$83/hour – Avg. service rate charged by CE pros$15.80/hour – Avg. wage for entry level technician$27.30/hour – Avg. wage for service technician$1,000 – Median parts inventory kept by CE pros$7,500 – Avg. tool investment for service dept.

Creative Sound & Integration, Scottsdale, AZ

2-tiered service plan

Success Story

IT Service Plan Success Story

Logic Integration, Englewood, Colo.

• Extended Service contracts (covers VPNs, NAS devices, LANs + A/V, cleaning service for equipment, calibration)

• 5% of total system cost (10% discount on labor for any upgrades)

IT/ Networking Success StoryAudio Video InteriorsMiddleburg Heights, OH• $100,000 in network service in first

year• Always replaces homeowner’s

existing wireless network• Bills annually• Contract offers certain number of

“free” service hours

Remote System Status Monitoring

• Manufacturers: Ihiji, CytexOne, Certified Cyber Solutions, Nuage Nine, eServices/Varan

• Single “black box” component that monitors all devices in a home theater are plugged in to. Device monitors the status of every component in the HT and sends communication to dealer w/ system failures/warnings placed in daily dashboard for dealers (lamp life, overheating, etc.)

• $2 to $3 per device per month• Typical HT w/ 5 components = $15/month or $180 per job per

year• @ 30 jobs per year = $5,400 per year

Remote Service Success StoryFusion Audio and VideoGreenville, SC

• Started charging $15/month to clients for BlueBOLT monitoring for time to re-boot systems remotely, etc… nearly 100% acceptance rate

• Started security several years ago after partnering for many years… now built up to several hundred accounts

Remote Status Success StoryHome Theater Design GroupAddison, Texas• Husband/wife owners; 6-person

company• Service is disruptive• Rely heavily on BlueBOLT connection

to every system – Required part of every installation

• No response time guarantee; clients seem OK with it since the system detects problems before they do

Tips for Selling Service Agreements• Try to sell one for every install

• Make it easy for customers to see the cost of adding a service contract

• Make the contract scalable… maybe just the theater room and not other

rooms?

• Allow sales reps and key service technicians to sell service contracts, pay

them commission for renewals

• Send reminders to clients when contract is due to expire

• Explain the bottom line costs with and without a service contract

• Don’t wait until after the installation to start discussing a service contract

Service Call Data

Most Frequent Products That Need Repair

1. A/V Components2. Interfaces3. Home Networks4. Control Systems Programming5. Security/Surveillance Systems6. Media Servers7. Lighting Control8. Flat Panel TVs9. Wiring/Cable10.Telephone/Intercom

Why Most Dealers Think their Service Department Is Profitable

Typical Service Call : 30 minutes on the job site … loose cable,

cable box reboot, or tripped power conditioner

Technician Cost = $13.50 (based on $27/hour wage)

Charge Hourly to Customer = $83/hour (bill only in one-hour

increments)

Profit = $55.50

If every service call was like this… it would mean a handsome

profit!

… But What About Travel Time or Lost Productivity

Typical Service Call : 30 minutes on job. 30 minutes travel (15

minutes each way)

Technician Cost = $27.00

1 Hour Lost Productivity on Another Job (that you cannot bill

the other client for) = $70

Charge Hourly to Service Customer = $83/hour

Your total Cost = $97

Loss = -$14

And Even Worse…

Difficult Service Call : 1 hour on job. 30 minutes travel (15 minutes

each way)

Technician Cost = $40.50

1 Hour Lost Productivity on Another Job (that you don’t bill other

client for @ $70/hour) = $140

Charge Hourly to Service Customer = $83/hour

Your total Cost = $180.50

Loss = -$97.50

And Even Worse…Nightmare Warrantied Flat Panel Replacement Service Call : 4 hours

on job over 3 visits (diagnosis, replacement unit installation, repaired

unit re-installed) + 60 minutes travel

Technician(s) Cost = $510.00 (9 hours for one tech + 2 hours for a

second @$12/hour)

Lost Productivity on Another Job (that you cannot bill the other client

for) = $770

Inventory Cost for Repackaging/Handling/Loading Repair Unit = $15

(one hour)

Charge Hourly to Service Customer = $0

Your Total Loss = -$1,295Are You Losing Money on Service Calls?

Do the Math!

Just one nightmare job eliminates the profit on 23 “smooth” profitable jobs!

Keys to Profitable Service• Go 24/7/365 = Are you willing to do it?

• Institute Remote Managed Service

• Outsource Service

• Set Geographic Boundaries

• Adopt “Mission Critical” Systems – burg, fire, CCTV, IT

• Limit Sales Department Promises

• Don’t Handle Firmware Updates for Clients

• Crosstrain Technicians

• Only Do Warranty Claims You Get Paid For

• Maintain Product Consistency Wherever Possible

• Incentivize Technicians to Upsell/Upgrade

• Stock Replacement Parts on All Vehicles

• Anticipate Replacement Parts based on System Type and Customer

• Solicit Preventive Maintenance Agreement (test and inspection) on

All Service Calls

• Prioritize Calls by “Emergencies” First – Send closest technician.

Avoid the “Throw out the schedule for the day” syndrome

• Establish a “Floating” Technician/Helper Position to Assist on 2-Man

Service Calls

Keys to Profitable Service (cont.)

• Provide Two-Hour Service Windows (technician calls customer if he

misses window)

• Policy Guideline: Set a 20-minute “Decision Time” by Technician to

Determine if He Can Repair the System within Allotted Time – If not, leave

and set up new, longer service window

• Always Document: “What You Found, What You Did, Time on Call, Parts

Used/Replaced” – Never get caught “Not doing anything” on the call

• Establish Strict Service Charge Policy that includes Payment for Travel

Time from “Shop to Job” or “Job to Job” – Train technicians on your

pricing

• Train and Promote a “One Trip Fix” system

Keys to Profitable Service (cont.)

Sample Extended Service ContractKey clauses

• If we can’t service it, we will replace it; we have the right to replace the

unit with a comparable unit

• The service cost on a single piece of equipment will never exceed the

original purchase price of that component

• Tampering with the system by someone voids the agreement; client

must follow owner’s manual instructions for individual components

• Programming and touchpanel graphics upgrades not included

• Travel costs are not included and will be billed separately

Thank you

Jason Knottjknott@ehpub.com

Selling Service Agreements & Other Recurring Revenue Options Jason Knott, CE Pro.

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