What are Those New Accounts Really Costing You?
In the alarm industry, revenue is most often measured by recurring monthly revenue or RMR. Generating new accounts means more RMR and a higher income stream for your company. And because the amount of qualified RMR you have to sell factors directly into the purchase price in an account acquisition, more RMR generally means more value for your accounts.
Many alarm dealers focus on the amount of RMR they are adding from new account sales, but that doesn’t tell the whole story and it doesn’t ensure they are building a profitable alarm company. An equally important, and often overlooked measurement, is the cost of creating new accounts, expressed as a creation multiple. Essentially, a creation multiple is the sum of the costs associated with generating new accounts, divided by the new RMR generated over the same time period.
Do you know your creation multiple?
Calculating your creation multiple requires you to have a good handle on your company’s accounting, including all of the incremental costs that you incur directly from obtaining a new account (equipment, installation costs, sales commissions, for example), all of the costs associated with your sales and marketing efforts and some portion of your administrative costs.
Here is a generally accepted basic creation multiple calculation:
Installation Revenue (money derived from the installation of systems during a specific period)
Minus Direct Installation, Sales and Marketing Costs (any cost specifically identified as attributable to sales, marketing or installation)
Minus Other Administrative Costs directly attributable to cost of goods sold plus 50 percent of all remaining Administrative expenses not attributable to cost of goods sold
= Creation Cost
Divided by Gross RMR created during that same period
= Creation Multiple (See the example above)
Industry averages for creation costs vary, depending on a company’s sales model. Generally, companies with traditional sales programs should aim to keep their creation multiples in the 25 to 30 times range, while dealers with well-run door-to-door sales programs should aim to keep their creation multiples in the 30 to 35 times range. Unfortunately, many companies focus on market share and RMR, and don’t really know what it costs them to bring on new accounts over the course of a year. As a consequence, they don’t really have a good handle on how profitable they really are, or could be, if they decreased their creation costs.