Attrition Essentials: Gross Attrition vs. Net Attrition
Does your attrition rate meet industry standards?
Attrition is a key metric in the security industry – but it’s also one of the most misunderstood. Many security company owners are shocked to learn that their attrition rate is much higher than they estimate – in part because they don’t know the essentials of attrition: how to calculate an accurate attrition rate, the difference between gross and net attrition (and why both are important metrics), and why maintaining an attrition rate at or below industry standards (about 12 percent gross) is so important to achieving both company profitability and maximum account value in an eventual sale.
Gross attrition measures the number of accounts your company loses over a set period of time (usually over the preceding 12 months), expressed as a percentage of the total number of accounts your company had during that time. Attrition includes both outright cancellations and aging accounts (more than 90-days past due). Because revenue is measured in terms of recurring monthly revenue (RMR), the more accounts you lose, the lower your RMR. There are also costs associated with generating new sales (installs), and the more accounts you need to generate to replace lost RMR, the higher your costs of creation, which impacts your profitability.
In an account sale, your gross attrition rate will be a primary focus of potential buyers and will directly influence the price they are willing to pay. To buyers, gross attrition also reflects the stability of your account base. They use gross attrition to predict the loss of RMR they likely will suffer each year after purchasing your accounts and to estimate the cost of maintaining the same rate of RMR through replacement of those lost accounts. Gross attrition factors directly into the multiple that buyers may be willing to pay for your accounts. A low gross attrition rate can also reduce the holdback amount – the amount of the transaction that is withheld from the initial payment for a period of time (usually 12 months), to cover the losses related to your attrition during that time.
Monitoring and managing your attrition regularly is a critical business practice. Do you want to get started, but you’re not sure how?
In our whitepaper, “Attrition: The Silent Killer,” Alarm Capital Alliance explains the fundamentals of attrition, how to calculate it, and what it means – both to your company and to potential buyers of your accounts. It also provides key strategies for combating attrition. Also, check back here for upcoming blogs with more information and tips for measuring, monitoring, and managing attrition.