The above business model canvas is for residential burglar alarm (BA) monitoring and home automation (HA) company.
The value proposition the company is that it provides intrusion monitoring for residential units. If a intrusion were to take place in a home that was monitored the company, the company would call the police and request dispatch. The company also provides home automation services where in addition to controlling lights, heating and cooling, the BA (burglar alarm) system can be armed and disarmed remotely. The key value proposition is the integration of BA and HA systems for customers that have both systems, so that the customer can program home automation responses in the event of a burglar intrusion into a home.
The company sells the BA system as a basic system and upsells the home automation components. The company sells its system either directly through its web site and on the ground sales force, or indirectly through a dealer network. The installation and hardware of the BA and HA systems are significantly subsidized. The customer is required to sign a 3 year contract and is charged a monthly subscription fee for monitoring. The fee is $40 a month for BA monitoring and $75 a month for BA and home automation. The 3 year contract is designed to ensure that the subsidized hardware provided is paid off and the company has net positive revenue at the end of the contract term. Early disconnects carry an early termination fee. This model is very similar to the consumer cell phone purchase model by AT&T and Verizon.
The company does not manufacture the systems it sells, thus key partnerships are formed with manufacturers of BA panels and home automation equipment. Prices are negotiated based on bulk pricing due to significant economies of scale. These lower prices are necessary to reduce the subscriber acquisition costs (discussed later).
The total market for BA systems is $13 billion and the total market size for Home automation is $14.5 billion. The competitive landscape has a few large players but no single company controls more than 5% of the market with a over 90% of the market still untapped. The company presented above aims to control 5% of the market for BA systems and hopes to increase revenues to $7.5 Billion. It hopes to tap 2% of the HA market and achieve revenues of $4billion. The segment size for BA is 300 million customers, and for HA systems it is approximately 200 million customers.
Costs structure is broken down into 3 key costs:
Subscriber acquisition costs (SAC): This is a variable cost dependent on each new sale. It includes marketing, sales, and equipment costs. The largest portion of the SAC is the subsidy on the equipment that is provided to the customer. Subsidies on BA systems are higher than subsidies on HA systems. These are calculated as percentage of the each sale and monitoring revenue over 3 years.
Monitoring Costs: These are costs involved in standing up and maintaining monitoring facilities to monitor and dispatch police if an intrusion event takes place. The costs are largely IT and resources. These are fixed costs and approximate about $1billion (or 10% of revenue)
Installation and Service Costs: These are costs related to have a large field support team in place. It includes installation equipment and vehicle expenses and the costs of the installers labor. These are also a fixed cost and are about 10% of revenue or $1billion.
Total costs for the business over 1 year is approximately $7 billion on expected revenues of $11.6 billion. EBIT is projected to be approximately $4.5 billion.
The keys to customer relationships are:
Retention: If a customer is retained past the 3 year contract term, the overall cost per customer is dramatically reduced as the SAC cost of that customer is totally recovered. Retention is key to increasing profitability
Acquisition: Due to the high fixed costs of monitoring and maintaining a large feet of installation and service technicians, an increase in customer base is necessary to reduce the overall fixed cost per customer. Acquisition is also necessary to gain market share.
Customer Service: Is necessary to ensure timely dispatch in the case of a intrusion event and verification with the customer that a false alarm event is not being reported.