How Can Security Integrators Replace Revenue In The Age Of Commoditization?
As more security equipment categories become commoditized, a previously rich source of income for integrators and installers – markup – is becoming harder to come by. Less expensive products with little to no perceptible value differentiation leave integrators with few options, not to mention the growth of pricing transparency that comes courtesy of the Internet. We asked this week’s Expert Panel Roundtable: Given the increase in commoditized hardware (i.e., lower profit margins), how should security integrators replace that profit/revenue?
Compared to integration services in the IT world, the business model for integration services in the physical security industry is a little more "backwards". That is, integrators give a lot of their actual integration/consulting/demonstrating services away for free in the hope of getting the project, and then they have to mark up the hardware and installation to make their margins. Integrators work free – sometimes for months, or even years – in hopes of getting the project. In the end, they may or may not get it after spending considerable time and resources. Faced with the commoditization of hardware, security integrators need to become more like IT integrators and start charging money for the value-added services they provide, such as system design, integration testing and product selection. Not only is hardware getting commoditized, but installation of network equipment doesn’t require low-voltage licensing in most areas, leading to the commoditization of installation, too.
This is definitely nothing new for the industry! Technical development has always influenced industries to not only accept new technical innovations, but also to adjust their business models to the “new game”. From my point of view, standardization plays a very important role in this changing landscape, especially now when so many talk about IoT or connected devices in so many different applications. Without standards, I do not think a true IoT will become a reality! I think it is unavoidable that those that are unable to adopt to new conditions stand to risk losing out or being left behind in the race.
My message will be redundant but it's 100% accurate. The integrator community needs to learn to embrace what hundreds of other contractor businesses have. They need to improve their predictable cash flow and margin by offering contracted services. Call it what you like – RMR, managed services, monitoring – the description makes no difference. The integrator community simply needs to get off their butt and make it happen. The alternative is to compete on low price. This model can work, but the entire DNA of the organization needs to be focused on one thing, low price. After 36 years of studying electronic security companies, I can say without hesitation, the contractor model of leading with low price sucks.
Online chat shows installers increase mark-ups as equipment prices fall. These tactics may sustain profit when labor and operational costs are rising. Yet customers expect electronics to get cheaper, so all boats sink on the same tide. More sales are forthcoming because buyers become less reluctant to swim or paddle out to them. If maintenance contract prices are a percentage of capital value, repeat revenue falls too. Yet as kit cheapens, so falls reliability. After 12 months’ warranty, increasing numbers of chargeable replacements might restore profit. Another CCTV consultant says he’s increased the percentage charged as his fee for each project. Simple analog designs have given way to many video formats and a world of IT design. Demands on his expertise and sheer effort increase while income drops. Often it's the optional extras that sustain a higher profit margin. Or, maybe, these days it's just harder to earn a buck.
Dealers who haven’t adjusted their strategies as a result of an ongoing, drastic drop in profit margins (from double to single digits) from hardware may find themselves looking at dramatically declined profitability over time and a lower company valuation. You can only stay in business so long selling commodities. Overseas manufacturing continues to change the face of security product manufacturing. The Internet has end users looking online for product pricing, some even purchasing hardware on their own. Monitoring revenue continues to tumble and become further commoditized, with some customers doing without and relying on smartphone apps to look in on the protected premises if there is a breach or alarm. Fortunately, most of the integrators and installing companies in the industry have changed their mindset – by focusing on services, niche markets and value-added differentiators. Now, more than ever, companies are embracing new markets and services.
The solution to this week’s quandary is easy to articulate, but harder to accomplish. Integrators and installers looking to succeed in the new climate of lower-priced, commoditized products just need to completely change how they do business (that’s all!). The good news is that many have seen the handwriting on the wall, and some are already in the process of making the necessary transformation. There’s actually a good chance our market can survive this, too, among several other recent challenges.
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