The subscription economy has been well-established in every aspect of our daily lives. How does it work for the service industry, specifically the security industry? Very well, in fact.
As our business set out to establish a subscription revenue stream in 2007, we struggled with adapting it to our business model. It seemed like a far reach from what we were used to and how we went to market. We were a locksmith company: We show up, service a lock or door, charge for it and leave. How does a subscription model that produces recurring monthly revenue (RMR) fit into that?
The alarm industry had this model figured out a long time ago. They created an installation model where the upfront price was low, contracts were signed and the service cost would subsidize the cost of goods and generate long-term RMR.
The locksmith industry doesn’t have any RMR in its base business model. The inherent business model is you generate revenue only while you work fixing locks, opening doors, repairing things and installing new products. So, the basis for a subscription model is to create a viable, usable product that the customer pays for continually that generates revenue while you work on other installations or, even better, while you sleep! This article will discuss how RMR is acquired, how it works and what you should do to get it and maintain it.
Model Business
There are several RMR models to implement for your business. (I also will use the term “subscription model.”) RMR is a common term, but it doesn’t have to be monthly. There can be quarterly or annual subscriptions.
Our business subscribes to several services — Google Workspace, Zenefits, Quickbooks Online, Amazon Prime, Audible (for audio books), GPS services to track our fleet and more. They’re ongoing services that we use to run our business. We have a low monthly scalable cost that gives us the ability to add and subtract as necessary while we get the latest from each of the services, because they all run in real time.
I subscribe to Hulu and Disney+ for the kids. Disney takes a few dollars from me each month, and my kids have unlimited streaming for whatever movies they want to watch. In return, I don’t have to buy DVDs of the movies. Plus, the channels are portable: Whatever device we have, we can watch the latest movies on demand.
All of the above companies have found a way to change their traditional business model from a physical widget they have to deliver to someone to a digital asset or an ongoing relationship with their customers where they continually provide value and new product offerings, because they changed their model from one that’s transactional to one that’s relational.
Now think about your business. When we service a lock or a door, solve the problem and charge the customer, it’s a transactional relationship. You can say you have customers who regularly use your services, but are they paying you without you having to show up and perform a service? No. Good RMR models include some ongoing value for the customer and a stream of revenue that doesn’t require direct service on your part.
Traditional software strategies are an easy comparison. Electronic access control (EAC) software is an example. When you sell a customer an EAC system that includes software that installs on their computer and you charge them a one-time fee for that software, then you set it up and leave, you just completed a transactional sale. They wanted a product or service; you provided it; transaction complete. As much as you want to believe it, they don’t require you anymore unless something breaks and they remember to contact you.
How can this be turned into a value-added relational transaction? Offer a customer a cloud-based EAC system that has a subscription model. The software is always up to date with the latest version, and the customer logs into the software through a link on your website. You can provide remote support or create a “Tip of the Month” email subscription where you send a customer ways to use their system more effectively.
You could do some of these same things with a nonsubscription model, but it still would require time on-site to update software and perform local support. For this example, it’s less about the software and more about the way it’s implemented. By providing an always-up-to-date version without you performing any additional work, your customer is subscribing to an ongoing service rather than making a one-time purchase.
That’s what we did. When I started to offer this service, it was difficult to sell, because I didn’t understand or believe that it could add value to the customer. After too many instances where the customer's computer died, the software was corrupt or any variety of issues that resulted in countless hours of work to repair because the customer didn’t create backups, I started to see an upside to the alternative of subscription services and cloud servers. From that point, it became the primary solution, not an alternative. The value for the customer was they didn’t lose time, data or money.
How to Start
Start with the end in mind. This is valuable advice we can apply to many situations. What’s the ideal amount of revenue you would want to generate in a 12-month period? One friend in the industry set out with a target to cover salaries for his support staff with the revenue generated from subscriptions. Another target could be a percentage of your current annual revenue, such as 10%. If your annual revenue were $500,000, your RMR target would be $50,000.
When working with targets, I like to start with an annual amount and then break it down to bite-size milestones. RMR of $50,000 per year is $4,166 per month or $961.53 per week. Your next consideration should be what subscription services you can provide that would deliver that.
Many EAC systems that have an RMR or subscription model follow a pricing structure per door. Camera systems that have cloud storage or remote monitoring follow a pricing structure per camera, and you also could provide maintenance contracts that provide quarterly preventative maintenance or a service contract for locking hardware. Here would be a simple model:
- 10 doors on EAC x $30 = $300
- 20 cameras on cloud storage x $12 = $240
- 4 maintenance contracts x $83 = $332
- 15 doors on service contracts x $15 = $225
Total = $1,097 per month
These are just estimates. Actual pricing will vary depending on your products.
This is an example of how to build a SMART (Specific, Measurable, Attainable, Realistic, Time-Bound) goal structure. You will adjust the goals accordingly based off your current business model.
If you sold four of these subscriptions during the first month, after year 1, you would have created $57,044 of revenue that would be billed automatically in year 2 without additional work on your end. Each year, you could build on the previous year through further sales. You should allow for attrition (loss of customers) and other variables.
Keep It Going
After you established your RMR, there are three things you should do:
Create a rhythm for invoicing and offer at least two billing frequencies. Monthly or annual billing is most common. We have offered quarterly and biannual billing, too, but 90% of all our subscription invoices are monthly or annual.
Create value for the customer that subscribes. The best customers are the ones you just invoice, they pay and you never hear from them again … until they open the invoice one month and ask, “Why are we paying this? What do we get out of it?” To keep them coming back, you might throw in email tips, quarterly or biannual checkups or discounts for additional services. And let them know what they get in exchange for the subscription. We recently had several customers inquire about additional administrative services for their systems, such as adding new users, shipping fobs or finding video clips. They’re willing to increase their subscription fee for ongoing access to this instead of additional charges per occurrence.
Create a simple and predictable pricing model. The reason Disney, Google, Hulu and other models work is because they’re simple and predictable. It’s the same value proposition you felt when mobile service providers started to offer unlimited minutes, text and data instead of having you monitor your use and getting frustrated with overages. They took the gamble that, with unlimited service, they would have certain individuals who would overuse the data and many who barely would use it. They gambled on the average and created a better value for their customers. Your customers will appreciate the predictability of the pricing model and will budget for it.
I believe that our industry is on the cusp of discovering a new pricing and business model that will affect us for generations to come. Software and cloud services are a great model to use and can affect your business now, but there’s no reason to stop there. What are other innovative ways to use this model? Can it be applied to restricted or protected key systems? How could you develop a subscription model around the physical door or frame? Thinking like that will open new doors to RMR.
Chad Lingafelt is managing partner of Loc-Doc Security in Charlotte, North Carolina. Loc-Doc Security is composed of a Locksmith and Door division, an Electronic Security division and The Lab, a digital content creation and software development division.
