To raise rates, or not to raise rates? That is the questions for many security alarm dealers as the economy strengthens, and costs such as fuel and labor continue to go up. We’ve worked with many companies to implement rate increases, and some approaches work better than others.
The goal with a rate increase should be to improve your margin while minimizing cancellations. For example, say an increase will increase your margin by $1,000 per month or $12,000 the first year. This increase in margins is rarely ‘profit’ but rather allows you to better cover cost or overhead levels that have crept up in recent years due to inflation. But you need to carefully implement the increase so that your improved margins are not offset by cancellations –i.e. account attrition.
In the above example, say you estimate you could sell your accounts for $800 each and you wanted a ‘return’ from your implementation of the rate increase within one year. That means that you need to limit your attrition caused by the rate increase to no more than 15 accounts ($12,000 divided by the $800 value/account).
Research
Before you implement a rate increase, you need to do some research.
First, check your monitoring contracts. Do they have any restrictions? Some contracts do not allow increases (or fix the monthly rate) for a specified period of time. Others limit rate increases to something like the Consumer Price Index. Most contracts, however, do not limit rate increases. Many do require written notice of rate increases, which affects how and when you communicate the change.
Second, survey your local market to determine where your rates are in comparison to your competition. Despite the fact that your costs may have risen, if your rates are similar to or higher than those of your competitors for a comparable service, it may be hard to justify an increase.
Third, export your recurring charges to Excel, and line them up by type and amount. Include the date and amount of the most recent rate increase if possible. Many dealers who have been in business for 10+ years often find that their older accounts signed on at ‘low’ rates by today’s standards – and have either never had an increase, or haven’t been increased to market levels.
Decide on the Increase
If your software tracks your historical rate increases, you also need to take those increases into account when determining whether to increase rates, and by how much. This is especially important to help you explain and justify the reason for the increase. Let’s say you implemented a modest rate increase five years ago, and nothing since. The Consumer Price Index is up about 11% in the last five years. So a 10%+ rate increase might seem reasonable and justifiable, in general, if the new rates are comparable to other dealers’ rates in your market.
However, across-the-board rate increases are usually a bad idea—selective increases work better. Some of the customer groups that deserve attention are:
1) Recently added accounts—It’s usually best to NOT raise rates for newer customers – those that signed on in the last 2-3 years.
2) Low-rate accounts—You may have ‘friends & family’ discounted rates that you’d prefer not to raise, but other older accounts with low rates may need to be increased by more than a dollar or two to get them back up to a more fair market rate.
3) Autopay accounts—The beauty of an account set up to be billed to a credit card or bank account is that they never show up on your aging…so you never need to chase them for payment. That’s a big time-saver, and for that reason you may not want to bump up rates for autopays.
Communicate & Manage the Increase
Most customers are reasonable, and understand that costs do go up. So key to this whole process is communicating the increase simply and effectively. We recommend a short letter sent 1-2 months in advance with some of the following key points:
- Thank the customer for their business and loyalty
- Make the case – no rate increase in X years, costs have increase Y% in those years, ADT and others often charge $35 – $45/month
- As a result, the company has decided to increase monitoring rates by X% (or a range of %)
- A request to call your office with any questions or concerns (provide a contact person’s name if possible)
You may also need to customize the letters based on the actual percentage increase each customer group will be getting, and you may want to send a smaller group of ‘test’ letters out first to gauge customer reaction. Be ready with some mitigation options or suggestions if you get calls from unhappy customers. Some good ideas are listed below:
- Offer a free service call, system inspection/test, and battery change
- Offer to waive the increase if the customer signs up for direct debit (autopay)
- Offer a year of system maintenance
Carefully track your cancellations (see article below), so you know how successful this effort was. If you handle it right, you should end up with more margin and a reasonable attrition rate.