Why do I have to sign an agreement?

Why do I have to sign an Agreement

So there is a lot of talk right now about why companies require term agreements for monitoring. So education and understanding is the key to understanding why agreements are a good thing for the consumer.

The easiest way for most people to understand how the alarm industry works is to compare it to the cell phone industry. According to IHS Markit, an IPhone 7 costs Apple $224.80 to produce the phone in China. They retail it for $649. There are other costs of course, Shipping, Marketing, support, employee costs, overhead, ect. How much do you think a satellite costs?  Everyone knows though that if you go to a store and get new service you can get the same phone for $99 or sometimes free. The cell phone company is taking a risk that if they can get you into a phone you like you will continue to pay the monthly bill and at some point they will make money. This type of pricing allows even poor people in this country have smart phones. Competition has pushed the upfront costs down and the margins slim. As long as volume is high the companies will make money. If you’re a cellular provider and you do not use this pricing method you are not going to make it because this has become the standard. If you’re a cellular provider and you do not have a way to pay for all of the up front costs for the phone and expenses, you are out of business.

The alarm industry is set up very similar but it wasn’t always. Not too long ago the old timers in the industry will tell you that no one cared about monitoring. They only cared about selling the system to the customer. They sold expensive systems with as many extra items as they could. The only people that could afford these systems were people that had a lot of money. The alarm companies had to make their money on the front end so the only people that were able to afford systems were wealthy or at least upper middle class. Then along came a change in the industry. More and more people now had access to phone lines. More and more people wanted alarm systems that for a long time had only been available to the wealthy class. So, companies started changing their pricing structure to appeal to the masses and not just the few. At first, the alarm companies just lowered their gross margins. They went from trying to make money on the equipment to just breaking even on the equipment, so the income was made on the monitoring. This worked great. The customer base expanded and so there was more money to be made. So much so, that companies of course started doing the math and competition lead to even lower up front pricing. The companies found themselves selling equipment for less than it cost them just to get the monitoring contracts. And that is where we are today.

Today companies evaluate their branches on “multiples”. Companies are graded and evaluated on how low of a multiple they have. A multiple is the number of months it takes before the company will break even on the accounts they have acquired. The normal in the industry is 15-22 months. Which means it takes 15-22 months before the company makes a dime on their accounts. Any profits they make come after that point and the profit margins are not high. So, how do the companies make it? The companies have to keep their customers happy. They have to make sure that the equipment they use isn’t going to break all the time. They have to insure someone is there to service the equipment not just install it and be done. If they do keep customers happy they may reach the industry average of how long a customer will normally stay with an alarm company (6 years). Profitable alarm companies are those that have done things at every step of the way to keep their customers happy enough to stay with them way past the contract term. If they do not the company will not survive their attrition rate. This is why you do not see many medium sized alarm companies. Either the company is very small and alarms are really a side job or the companies are gigantic national companies. Medium sized companies have to have vision and monetary means to justify the initial expenses. They have to have good plans in place and the ability to see the investment dollars for the initial expenses as an investment.

To recap, why do companies require an agreement? So they can keep costs low and more people can afford them. So better products are used to insure customers are happy. So companies are forced to take care of their customers after the sale.