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||| LEGAL BRIEFING ||| BEACON LIGHTS WAY TO LOWER ATTRITION by Ken Kirschenbaum Ken Kirschenbaum has been a recognized counsel to the alarm industry for 35 years and is principal of Kirschenbaum & Kirschenbaum, P.C. (www.kirschenbaumesq.com). His team of attorneys, which includes daughter Jennifer, specialize in transactional, defense litigation, regulatory compliance and collection matters. The opinions expressed in this column are not necessarily those of SSI, and not intended as legal advice. W hat is the relationship between Beacon credit scores and attrition in the alarm industry? Are there any statistics, studies or reports on the issue? Some dealer programs that buy (or end up owning) monitoring accounts won't accept subscribers who don't have high enough Beacon scores. I have been wondering if there is truly any solid basis for this decision. Alarm companies that regularly fnance or sell their subscriber contracts, particularly residential contracts, may have to provide Beacon scores for the subscribers. Alarm companies that install alarms for free or well below cost also have to be concerned with a subscriber's fulf llment of the RMR contract, typically for monitoring, but could also be for lease of the system. Te theory is likely that poor credit translates into a greater chance that the subscriber will fail to perform for the duration of the contract term. Since completion of the contract term is an essential element of the anticipated proft alarm companies and those companies that purchase alarm contracts realize, they need to establish some criteria to evaluate the risk of buying a contract and then waiting out the 35-plus months to recoup the investment. To get a more defnitive answer, I asked one of the industry's best-known fnancial experts, Mike Barnes of Barnes Associates, to weigh in on this topic: T e simple answer is yes, there is a correlation between Beacon scores and attrition. We have reviewed data on more than 2 million accounts where we could segment by credit score and track attrition over many years. Generally speaking, the correlation changes over four ranges of scoring. Below 600, the statistical experience is very bad. Tat is, the accounts have a very high cancellation rate. Between 600 and 650, the results improve dramatically, with a general infection point around 620±, which is why so many dealer programs (and in some cases credit facilities) have restrictions around this area of scoring. Between 650 and 700, the results continue to improve steadily and, broadly speaking, above 700 accounts tend to behave the same (e.g. 170 / SECURITYSALES.COM / SEPTEMBER 2013 Below 600, the statistical experience is very bad. That is, the accounts have a very high cancellation rate. Between 600 and 650, the results improve dramatically, with a general infection point around 620±. an 800 Beacon score account does not behave materially better than a 750). Generally this analysis is done by tracking vintage pools of accounts over time (e.g. accounts originated in January 2000), where the accounts are relatively the same and originated by the same company, with the only diference being the credit score. Te range of cumulative cancellation is much higher for accounts with Beacon scores below 650, with upwards of twice the level of cumulative cancellation by their fourth year. Additionally, and as one might expect, the low scoring accounts cancelled at particularly high rates in the frst year of their existence. Tis "infant mortality" is particularly impactful on the returns associated with the cost to originate and/or acquire the accounts. A whole host of factors can infuence the absolute and relative results, but the general relationship indicated is consistent. Tese factors include: amount of installation fee charged; the number and type of services provided; pricing; payment method; contract term; geographic location; etc. With the industry generally having to subsidize the cost of purchasing and installing an alarm system (collateralized by the high margin recurring revenue payments), it is critical to understand this dynamic. Te great players are using analysis around this variable to better manage attrition and target their eforts. SECURITY SALES & INTEGRATION (ISSN 1539-0071) (USPS 511-590) is published monthly by Bobit Business Media, 3520 Challenger Street, Torrance, California 90503-1640. Periodicals postage paid at Torrance, California 90503-9998 and additional mailing offices. POSTMASTER: Send address changes to Security Sales, P.O. Box 1068 Skokie, IL 60076-8068. Please allow 4 to 6 weeks for address changes to take effect. Subscription Prices - United States $96 per year; Canada $96 per year; Foreign $140 per year. Single copy price - $8; Fact Book - $35. Please allow 4 to 6 weeks to receive your first issue. Please address Editorial and Advertising correspondence to the Executive Offices at 3520 Challenger Street, Torrance, California 90503-1640. The contents of this publication may not be reproduced either in whole or in part without consent of Bobit Business Media. All statements made, although based on information believed to be reliable and accurate, cannot be guaranteed and no fault or liability can be accepted for error or omission. ken@kirschenbaumesq.com