Do you know the difference between gross and net attrition rates? More importantly, do you know how to calculate these metrics for your own company?
If you don’t, you’re not alone in the industry. Many people don’t know the essentials of attrition, and many long-time owners of alarm companies are unpleasantly surprised when they discover during the sale of their accounts that their attrition rate is much higher than they estimated.
Basically, attrition measures the number of subscriber accounts that your company loses over a period of time, expressed as a percentage of the average number of accounts you have over the same time period. Attrition is typically measured as losses over the trailing year (from August of last year to August of this year, for example). Many people are surprised to discover that, by industry standards, accounts that accounts more than 90 days past due are considered cancelled (regardless of whether notice has been given) and must be factored into your attrition calculations.
The alarm industry views both gross attrition and net attrition as important – yet different – metrics. Gross attrition reflects the total number of accounts that cancel, either outright or are 90-days past due. Net attrition adds back the accounts that your company has gained over the course of the same time period that directly replace those accounts that have canceled (a new customer that moves into the home of a cancelled customer, offsetting the cancellation, for example). New installations are growth and are not included in net attrition.
For potential buyers, gross attrition is the more critical metric, because it represents the percentage of accounts you’ve actually lost from your overall account base. In simple terms, buyers use gross attrition to predict the loss of RMR they might suffer each year after purchasing your accounts. In today’s industry, a profitable alarm company should have gross attrition of 12 percent or less (net attrition should be several percentage points lower).
You should monitor your short-term (annual) attrition monthly or quarterly can help you identify current issues quickly, before they get out of hand. Tracking long-term attrition – over a three-to-five year period – can also help identify trends and issues that you may not see in short-term attrition numbers.
Tracking your attrition rate is just the first step in managing your attrition. You will need to review and evaluate the data, and identify and implement strategies to drive down attrition and, ultimately, maximize your revenue and the value of your accounts.
Not sure what your attrition calculations means or what to do with the data?
In our whitepaper, “Attrition: The Silent Killer
” Alarm Capital Alliance explains the fundamentals of attrition and provides key strategies for combating attrition. Also, check back here for upcoming blogs with more information and tips for measuring, monitoring and dealing with attrition.