ADT Customer Acquisition Cost EconomicsBy: Brian Rhodes, Published on Jan 21, 2013
Signing up new alarm monitoring customers requires spending a lot more up front than the customer pays. But just how much? In this note, we review ADT's financial documents for specific answers and a breakdown of the costs incurred and the time needed to recoup the investment.
Alarms Business Model Examined
The installation and monitoring of intrusion alarms is different than telecom services that invoice equipment and installation on a per-monthly basis, ADT amortizes equipment and installation cost over a long period. Instead of charging the full 'lump' payment on the first or second invoice, ADT bills out a flat fee every month.
Another significant difference between ADT and many service industries are the extension of contracted minimum service periods. If someone wishes to cancel cable service, often they simply call the provider and terminate service. Contrast this with ADT - one cannot simply cancel service until a minimum term has been reached. While there are several reasons for this contract-bound service period, the largest is simple economics - in order for equipment to become 'affordable' at consumer price points, the total cost must be spread over 36 or more months.
Because ADT is a publicly held company, they are required to publish certain financial information and otherwise make details about the workings of their business public, in order to attract potential and inform existing investors. One typical document package is simply called 'the investor deck'. We dug into ADT's investor deck and pulled out several revealing slides:
For example, ADT spends a lot of money, and not just for the install, but for sales and marketing:
While the average customer pays $650 up front, it typically costs ADT $1,725 with 45% going to sales and marketing expenses. As such, they 'invest' or have a ~$1,000 negative cash flow position to start.
More Profitable Organic Growth
Another compelling detail revealed by the deck - When ADT buys an account from it's structure of dealers, it costs them about $100 more per account to pick up the business:
Time on ADT's Side
It takes a long time to turn a profit on a typical account. After the hardware, installation, and other various P&L costs are accrued, it takes ADT an average of 3 years of customer payments to break even on the account:
Since they need to cover the ~$1,000 initial investment / deficit and it typically takes them 3 years, this means they make an average gross profit per month of ~$27. The '36 month' contract that seems excessive long to many actually shows to be nominally profitable for the company, and it is not until they are into the 37 month and beyond that a typical account 'turns black' for ADT.
Despite the protracted payback period, the 'fine print' of many ADT contracts reveals that customers never actually 'purchase' their systems, but only make payments on what amounts to an extended lease. While not every contract is structured in the way, the arraignment means that customers do not actually own their alarm system at the end of a contract period and cannot simply find another monitoring company to provide service - in effect, they are 'perpetually' locked into buying service from ADT.