ESX Chairman's Address - George De Marco

Attrition is one of those Key Performance Indicators (KPIs) that every electronic security company should monitor closely. Although adding new customers is more appealing than measuring attrition, the ramifications of attrition are infinitely more valuable to owners and investors of security companies.

In the electronic security industry, attrition (or churn) is more clearly defined as the rate of loss of customers and the associated recurring monthly revenue (RMR) or a reduction in a customer’s RMR fees. Basing it solely on the number of customers lost or gained, without proper analysis, is misleading – and not an accurate measurement of a company’s health or value. The data collected needs to be relevant and meaningful to help the company determine if it is on the right track, traveling in the right direction, and going at the right speed.

Based on industry statistics, the average retention of a residential customer is seven years for monitoring services. However, with the introduction of interactive services, many consumers prefer remotely managing and controlling security and lifestyle functions such as arming and disarming security systems; viewing video images; controlling thermostats, lighting and window coverings; and locking or unlocking electronic door locks.

Does this mean the average retention period will increase because the consumer is more engaged and experiencing the benefits daily? As more and more attrition data is collected in the future, the retention model will be proven one way or the other, revealing attrition trends for interactive services.

Here is another aspect to consider with attrition: as the economy improves, businesses begin to grow and expand, and consumers move households causing a “positive churn” effect. In this scenario, as businesses and consumers move about in a company’s service area, instead of losing an account and the RMR for that property, the company could experience a net gain of one account – retaining the existing customer at the new location and adding a new customer for the existing home or business. This becomes a powerful opportunity for companies to minimize attrition and increase RMR.

Higher attrition, in addition to negatively impacting the customer base, go-to-market strategies, and internal RMR growth goals, can affect other aspects of a business:

• Employee morale and turnover – customer churn has a direct correlation to unengaged employees, not to mention the cost and time factors of managing HR.


• Funding – replacing RMR without RMR growth restricts the company’s ability to attract capital - growth capital is challenging if the company is standing still.


• Asset valuation – it can be the difference between receiving a big X or a little x (multiple of RMR) for the asset.

Companies that use a KPI, such as attrition, can better understand the overall health of their organization. Properly tracking, analyzing, and measuring attrition helps owners and executives uncover company success (or failure) factors, such as:

• Efficacy of organic or acquisition growth strategies


• Resonance of the company’s products and recurring services with their customers


• Favorability of the customer experience


• Appropriateness of the marketing and pricing strategies


• Training and engagement of the employees


• New competition, products or services entering the market place


• Existing competition with a fresh go-to-market strategy

Four Steps to Minimizing Attrition:

1. Track it – Collecting the right attrition data is a critical step. Harnessing the data and using it wisely is priceless. Tracking the addition, deletion or modifications of RMR monthly tells an intriguing story of what a company ultimately should be paying attention to, and helps to determine if the company is healthy, vibrant and on goal.


2. Analyze it - Choosing the right attrition data to analyze is essential in the process. The most significant data includes discovering the reason for the change in the customer status – the process should not be a casual approach or review. Careful data collection and thorough analysis of the reasons allows the company to develop and implement a workable action plan that effectively manages customer attrition.
   
   To get a clear understanding of the effect attrition has on your company, track gross attrition, analyzing the lost RMR and reasons for the cancellation or reduction of services. This can easily be accomplished monthly. However, justifying the attrition rate by only calculating the net percentage lost, without addressing the underlying causes on the gross number, is not properly analyzing the data. A good process is to determine the gross and net attrition numbers separately and then look at each metric individually to understand the true causes of customer churn.


3. Work it - The real work in reducing attrition is to do something about it. After rigorously analyzing the underlying reasons, the next step is to develop a customer retention program that addresses the major attrition factors. Management must determine if it needs to adjust pricing strategies, introduce new services, or remove pain points that customers and employees experience with the company. In many cases, the simplest and least expensive changes to processes and procedures have the greatest impact on improving the delivery of the customer experience, and reducing customer churn.


4. Assess it – Measuring for results determines if the customer retention program is successful. Based on the results, identify on-going attrition factors that can be changed to minimize customer churn. Having the right empirical data and corresponding results helps to determine if the right processes, procedures and training requirements are in place for improving sales, installation, service, accounting, and call center activities and results. Well trained and engaged employees are essential to enhancing the customer experience, and ultimately lowering the attrition rate. Reducing the attrition rate by just 1% delivers significant returns for an organization.

Whether the goal is to grow RMR by 1%, 10% or 100% on an annual basis, paying attention to the micro trends in your organization will help reduce attrition, improve revenues and profits, and increase the value of the company. How you choose to address the underlying causes and effects is up to you. The only way to reduce attrition is to track it, analyze it, work it, and measure it for results. Keeping customers and employees engaged keeps RMR in line.

I encourage you to attend ESX 2018 to learn more about Key Performance Indicators for the industry in our peer-led educational sessions.