A Competitive Niche
February 1, 2008
The increasing affordability of home technology is making it a growth market for residential security dealers and integrators. Yet due to the diversity of products that are desirable by homeowners, many integrators have found that identifying and developing a niche service has contributed to their success and profitability.
In this article, SDM profiles four home system integrators that have become significant competitors in their market areas, because of the niche services for which they are known. These companies share their experiences in how they are benefiting from consumers’ desires for all things related to electronic home control and entertainment.
KEEP IT SIMPLE â€” GIVE IT VALUEThe home systems niche for Safeguard Security and Communications Inc., Scottsdale, Ariz., is the middle-market customer whose distributed audio and video system costs in the range of $10,000 to $25,000, says John Jennings, CEO. His company passes up more elaborate systems.
“Those are difficult for a firm like ours to do â€” it’s hard to manage the expectations of the client,” Jennings explains.
The typical mid-market niche for Safeguard Security includes structured wiring for whole-house audio and video, and a home theater. “We try to keep it pretty simple; people appreciate that,” Jennings maintains. “The easier it is to operate, the more they’re going to use it.”
The company does approximately 150 installations monthly, of which about 20 percent include audio/video or home control, Jennings estimates. Of the 150 jobs, about 100 are new construction.
Although new construction has plummeted by two-thirds in the Phoenix metropolitan area, Jennings reports, his company has not seen a significant downturn in its residential business because it exited the tract home market four years ago.
“We just didn’t see a whole lot of value there,” he concedes. “We were doing millions of prewires and exited that entire business.”
Installing prewires required extensive manpower, Jennings says, and many of the prewires ended up being connected to other alarm companies.
“It wasn’t profitable or worth our resources to do it,” he says. “What we are in now is the high-end condo market. It’s still going fairly strong for baby boomers coming here for second homes or selling their homes and downsizing.”
Despite being in an area known for its retired population, Safeguard Security is not seeing enough personal emergency response (PERS) business to justify offering it in its own central station.
“We market it, but we’re not equipped to handle PERS business. It’s just a different type of mindset as far as the operators are concerned,” Jennings explains. “It’s more labor-intensive â€” you have to be on the phone longer.
“It has to have a certain market mass,” he says of the PERS business. “Until that gets significant, we will continue to subcontract it out.”
Despite being located in a desert, the company’s next home offering will be water and environmental sensors in case a supply pipe breaks. “I’ll add on whatever makes sense,” Jennings pledges.
His company has installed only about 10 residential video systems using DVRs and cameras, but Jennings is investigating newer systems being introduced that do not require a DVR and make video available to customers’ cell phones and personal digital assistants (PDAs).
“We’re starting to figure it out and starting to sell it,” Jennings says of residential video. “Video is going to be an RMR opportunity.”
Jennings thinks wired computer networks are being replaced by wireless ones that provide access to the Internet and printers. “The only thing you need wiring for is video and audio, but I think with the advent of wireless cards, the wired home is becoming less and less of a requirement,” Jennings comments.
Safeguard Security does some integrated control of thermostats, but customers so far have requested only simple lighting control from the basic systems offered by lighting manufacturers or with modules through a home’s power lines.
Jennings’ advice for security dealers or systems integrators thinking about entering the home systems market is to be patient.
“There’s a big learning curve,” Jennings admits. “Get the right people working for you. The problem I find is more of the people in audio/video are audiophiles who have to go do the real cool stuff.
“I look at it from the client’s point of view â€” what do I want to do?” he asks. “Call my son to turn on the TV, or can I just do it myself? That’s the approach we took. We get very common-sense people to design the system and stick within that niche.”
THE FUTURE IS IN THE TUBEA unique home systems niche has been developed by Joe Dodd, president and owner of 2 Guys Audio Video, Gresham, Ore.
“We do a little bit of everything â€” security, intercom, video and audio, phone systems, Ethernet networks. On some [installations] we tie in lighting and HVAC,” Dodd explains. “What we have found is most of these systems are proprietary, and the stuff is changing so fast â€” that is where Carflex comes in.
“We take a product called Carflex that is known in the industry as Smurf tube, and we use that tube from a distribution panel to allow the future proofing of the home without the cost of the wire in the tube yet,” Dodd explains. “So now if people don’t know what they want, it doesn’t really matter.”
Dodd estimates installing wire in a new home can cost $10,000, whereas installing Carflex may only cost $2,500 and installation of the wire can be deferred; the tube will always be there to pull through whatever cable is chosen months or years later.
“It just goes back to the old days, in the 1920s, when it was wired with armor-clad wire â€” a tube with wire in it,” Dodd points out. “Now it’s a plastic, flexible tube, and you put any kind of wire in it.”
“We positioned ourselves to be a one-stop solution for all things â€” an RV, boat, long-haul truck â€” if it flies, drives or floats, we do it,” Dodd declares. “We do yachts, ski-boats, ATVs, trailers for scuba divers, all kinds of crazy stuff.
“We cover a lot of bases that a lot of other folks just don’t do,” he points out. “They take a specialty item and stick only to that.”
He explains why Carflex is called Smurf tube. “It’s colored like a Smurf â€” brilliant blue or orange or pink or blue or green,” he observes.
Dodd currently is installing systems for one developer he met through his accountant in 55 custom homes located along 26 miles of Oregon coast. Some are single-family homes in subdivisions and others are condominiums.
He estimates that 60 percent of his residential business is retrofit and the rest is new custom construction. Some of them are second homes, so the slowdown in new construction has not affected him much.
“Some of our retrofits are very classic homes built 110 years ago,” Dodd points out. “A lot of our local competition won’t touch those homes; they view it as too much liability. We view it as a challenge.
“We make our money on labor, not selling product,” Dodd explains. “A plasma TV we sell makes us 20 percent on a good day, but labor makes us 51 percent. We prefer a more labor-intensive job than one that has a big product margin.
“The biggest system we’ve ever done was $150,000 for a home,” Dodd remembers. “Those homes you’re married to for a long time, about a year actually. What we found is that’s about 1 percent of the market. That just wasn’t enough to keep us occupied. We like those $500,000 and down homes.”
Dodd utilized his experience customizing vehicles to create a showroom on wheels. “My techs and I built a trailer with a full home theater system that I can show people,” he relates. “I was frustrated I couldn’t find a builder who would take this as far as I wanted to go. We were asked to be on TV with this thing.”
The challenge of designing audio/video systems in vehicles has made Dodd see home systems completely differently.
“Our approach is we try to learn what people’s needs are, what their lifestyle is really like, and adapt the system accordingly,” Dodd recommends, adding that his company’s WAF â€” wife acceptance factor â€” is very high, a necessity for a successful home theater installation.
“The flat panel technology was manna from heaven for us,” he concedes. “The other neat thing about flat panel is it makes people want to know a little more about this stuff, which is great. That’s the only reason we even wanted to get involved in the satellite business, because it got us invited into custom homes.
“All of a sudden we’re invited in with open arms and doors, and then we get to show them what we really do,” Dodd explains. “That has been a huge shot in the arm for our business.”
THIS BUSINESS IS IN THE CELLARThe home systems niche of EMC Security LLC, Lawrenceville, Ga., is in the cellar â€” literally!
“We’ve got three basement jobs going now,” says Alan O’Rouke, division manager for new construction business. “Instead of customers purchasing new homes, they decide they’ll finish their basements. We’ll become involved with them. The jobs will average $18,000 to $25,000, which is not bad for finishing a basement with audio and video in it.”
O’Rouke estimates up to 42 percent of the company’s business is home systems other than security. “We’ll end up doing more home systems other than security next year than what we traditionally have done as just a security company,” O’Rouke predicts. “The builders led us down this path.
“We had agreements with builders to do security systems, and along the way, they would ask about phone cable, or say they had a customer interested in central vacuums or wanting to put a flat panel above the fireplace, and ‘can you help with that?’” O’Rouke relates. “We’ve been doing this for four years. It’s just kind of escalated and taken us in a direction we did not expect to be in.”
EMC Security offers monitoring for half the rate of the national companies, O’Rouke says. “What we do to get a recurring revenue stream is offer extended warranties on TVs or DVD players, or speakers, and the customer can add that onto their monthly fee,” O’Rouke points out. “So, for example, an extra $10 a month will give you extended coverage on your TV that you purchased from us.”
Another recurring revenue opportunity is maintenance on central vacuum systems. “We keep a log of what customers have purchased central vacs, and we will call them one year after installation and do a diagnostic check and replace the filter, things like that,” O’Rouke notes. “That’s good service for them.”
O’Rouke’s advice for those considering entry to the home systems market is to be fully trained.
“We’ve learned this the hard way â€” you absolutely want to learn as much as you can about that specific area of business you’re going into,” he advises. “For example, if you want to put in a small surround sound system, you need to know exactly what you’re going to do and how you’re going to operate it. So my advice is to learn everything you can about it so you have 100 percent customer satisfaction going in.”
STICKING WITH NEW CONSTRUCTIONEven though the new construction market is depressed in his area, Larry Korff, co-owner of JM Resources Inc., King of Prussia, Pa., thinks a leopard can’t change its spots without a lot of spot cleaning.
“This is deeper than I’ve ever seen in my 25 years,” Korff says of the downturn, “and yet, I’m just looking at our sales report, and last week was a very good week for us. It’s not as consistent as other times.
“We started as JM Security Systems 26 years ago, and in 1994, although we had been doing it already, we changed our name, because we saw ourselves as an integration company,” Korff relates. “We still do plenty of alarm. The alarm is what we started with and still is the core, we think, of structured wiring, which has evolved and grown nicely.
“We’ve been working with builders for the last 25 years, so that’s our niche,” Korff emphasizes. “When we started doing it, I didn’t find anyone doing it. Today, there are many doing it. A lot of other companies have gone after that niche to my dismay, of course. It was easier when no one was.
“Builders are relationship-driven, so we form relationships with them over many years,” he continues. “You need to offer them solutions, but you need to have a relationship with them as well. That’s what we’ve been about doing.”
He does prewiring and meetings with homeowners. “We meet clients on behalf of builders, or we put together solutions for builders and then we meet clients,” he relates.
Korff estimates 95 percent of the company’s business is new construction. Rather than doing retrofit, he thinks the company will expand its 5 percent of commercial business up to 40 percent to take advantage of the inverse relationship of new residential to new commercial construction.
“Institutions and schools and churches are not down, so we’re looking for more even flow there,” Korff suggests. “We are a new construction company that does technological systems, and to try to call yourself something else would be a whole different skill set.”
Korff’s company specializes in the mid-range of home prices. “We’re focused on new technology and homes that will always exist,” he stresses. “It may change in term of uptimes and downtimes.
“The growth area is about connecting things,” Korff predicts. “We really think the buzz of the future is making homes more efficient.”
Those thinking of entering the home systems market must make a strong commitment to “changing their spots.”
“To be a systems integrator is not an easy thing to do,” Korff asserts. “You have to be skilled at multiple trades as well as selling it. If you’re an alarm company, you can’t just run out there and run wires for other things.
“So I think it would be hard for a lot of companies,” he concedes about starting in home systems. “You have to really dedicate yourself to being that, and one of the ways we did it was we stopped being an alarm company and changed our name and committed to being an integrator of systems.”
That commitment required cross-training of technicians. Instead of needing four different technicians skilled in each of the home technologies to wire every job, each of Korff’s technicians can install all four types of wiring.
“It’s taken years and a lot of training, and that’s a lot of money, to install all four systems,” Korff cautions. “If your guys weren’t skilled, you could look worse to your client than better. The worst is to tell your client you can do something, and then fail at it.”