July 13, 2012
ADT Update: Some Alarm Companies Lose Customers Faster than Others
When alarm industry executives discuss their respective companies, they agree that one of the most important metrics to track is the rate of customer cancellation, sometimes called “attrition,” which is usually measured on an annual basis and expressed as a percentage. In other words, if an alarm company has a cancellation rate of 10%, then they are losing 10% of their customers (and by extension 10% of their recurring revenue) each year – or, one out of 10 customers each year.
Back in the 1980’s, when I joined the alarm industry, a 10% cancellation rate was nothing to be proud of. Most companies tried to achieve 6%, but the norm was closer to 8% - meaning you lost roughly one out of 12 customers a year. Times have certainly changed: alarm industry cancellation rates now average roughly 12%, and some companies are even worse than that. In fact, industry giant ADT is one of them.
I recently saw a Wall St. analyst’s earnings report for Tyco, ADT’s parent company, which discussed financial results for the second quarter of Tyco’s fiscal year. Revenues were up, although earnings were below the estimated consensus. But what really caught my attention was the following news on ADT:
Revenue increased 5% in the quarter both on a GAAP and organic basis to $807 million. Revenue growth was driven by 3.5% growth in average revenue per user (ARPU) and 2% growth in customer accounts. The 13.2% attrition rate for the quarter was flat year over year, although it increased 20 basis points sequentially.
That’s right – a 13.2% cancellation rate, and it was that high last year as well. That means that ADT has been losing one out of every 7.6 customers a year! If you accept the reported total count of 6,800,000 customers, ADT would be losing 897,600 customers each year. In fact, only one other alarm company in the US (Protection One, a distant #2) even has as many accounts as ADT loses each year. No wonder ADT spends so much on advertising for new customers!
So, why do home alarm users cancel their monitoring services? While the relative percentages of the cancellation reasons have changed a bit over the last few years, the biggest reason is still people moving. Here’s a chart showing the overall industry trend in cancellation reasons:
When you move, the traditional alarm system is stuck in your old home – and if you’re in a multi-year contract (which is standard), then you’re stuck with a penalty as well! That’s when having portable peace of mind is a tremendous advantage – and it’s one more reason why so many people appreciate FrontPoint’s simpler approach to wireless home security, where you can take your system with you.
As the numbers above indicate, “Moving” is still in first place, but has dropped from 51% to 41%. And that’s not because it’s any easier to move an “old school” alarm system – it’s because the second reason, “Financial,” has increased so rapidly. In fact, the gap between these two biggest reasons has narrowed from 31% to only 9% in only five years! At this rate, “Financial” may replace “Moving” as reason number one – which would not speak well for the overall alarm industry.
What’s behind the “Financial” reason for canceling alarm service? Several issues are bundled into this one category, but the bottom line is that the customer has stopped the service. Remember, most of the alarm systems being sold today are still phone-line based, do not offer interactive features, and may have been sold to homeowners who were not even looking for an alarm system to begin with – probably by a “door knocker” alarm company. Here’s a partial list of cancellation drivers under the “Financial” heading:
- Customer was pressured to purchase the system in the first place, and subsequently canceled.
- Customer did not really understand what they were buying, and subsequently canceled.
- Customer does not trust or use the system, and cannot justify the ongoing expense.
- Customer experienced economic hardship, and subsequently canceled.
In other words, much of the basis for the relative increase in “Financial” cancelations may be attributed directly to behaviors of the alarm companies themselves – especially the pushy tactics used by many of those door knocker alarm companies.
FrontPoint is proud to have the lowest cancellation rate of any nationwide alarm company, and it’s only a fraction of the rate reported by ADT. Many factors go into this accomplishment: we offer systems that are safer, smarter, simpler, more affordable, and virtually impossible to defeat – and your FrontPoint system moves with you. We also take a refreshingly transparent and consultative approach to explaining our products and services – it’s a big part of what drives our overwhelmingly positive reviews, and makes us the leader in wireless home security. When you are ready for the best peace of mind you can find, give FrontPoint a call. We expect you’ll be a FrontPoint customer for a long, long time.