Amazon.com survives on margins of 2 percent. Could your business sustain that?
Many security installers enjoy a “lifestyle” business — typically, long-established owner/managers with little or no financial leveraging. There’s intolerance for low margins and a pride fuelled by an obvious lack of debt. The electronic security sector in the UK is populated with some 2,500 approved SME companies, preponderantly national security installers and FM companies — the latter with very different corporate strategies.
Many believe Amazon’s approach to e-commerce is cunningly unique and not at all risky. Its investors have mixed views. Some are in it for the long haul, believing that e-commerce is in its infancy and therefore there’s a “land-grab” opportunity. Others are more skeptical and regard its strategy as unsustainable and fruitless to investors.
Amazon recognises that e-commerce is a fledgling market with everything to play for. It also has an interesting way of dealing with competitors. Along with fighting them on margin and service, Amazon is also preventive in keeping competition out. It takes a brave challenger to co-occupy a space that’s making such low margins. Amazon prides itself on providing premium customer service levels and enjoys a year-on-year growth rate of over 30 percent (that’s beating Wal-Mart by a factor of three over the last ten years).
Unregulated security firms
Within the last month I contacted 25 installers and alarm receiving centres (ARCs). The overall opinion was unanimous: Margins are lower because there’s downward pressure from their customers being directly influenced by the turbulent economy.
Clients want the same for less, and will shop around. If the inspectorate-recognized installer doesn’t provide this, the contracts may fall to a smaller company with less overhead and no aspirations of expansion or investment. There are estimated to be nearly 10,000 unregulated security companies in the UK alone. If the regulated installer is fortunate enough to win the job, the margin squeeze gets passed on to its equipment supplier and/or ARC.
The ARC is the next casualty in the value chain. UK ARCs have remained in strict autonomy for the longest time. There is bound to be aggressive competitive pressure when ARCs compete for the same business. Specific USPs aside, the main differentiator always falls to price. There is a stagnation of UK ARCs as very few get bought or sold. The picture has remained fairly constant for the past 10 years, notably in the third-party sector.
Some argue that the security sector should be evolving at a greater pace, especially as the world around it is changing so rapidly. It’s not enough to expect to turn out the same products and services and expect more from the “traditional” and more saturated market. Our sector is only recession-resistant, not recession-proof.
The secret weapon for installers
The lifeline lies within the very area installers dislike the most: the dreaded red tape. Our sector is tightly controlled and heavily legislated because it provides a critical service protecting lives and property — a bit different from packing and posting a Kindle, you might observe.
The key to higher margins lies within the hands of installers that are approved by an inspectorate (either NSI or SSAIB). This is the secret weapon for keeping cowboys out and averting reputational damage whilst maintaining sensible margins.
With the support of their trade associations, inspectorates, insurers, police, and other key influencers, installers have the tools to innovate while providing excellent service and long-lasting recurring contract value. Most installers factor in long-term resilience as part of their price simply because regulation demands critical resilience over the life of the installation.
Perhaps the closest association between our industry and Amazon’s desired destiny is a recurring income stream. Amazon has always enjoyed repeat business from books and music. More recently, TV and film distributor agreements have provided true subscription-based repeat income.
Amazon’s strategy continues to see the value in recurring revenue, with its maturity promising the real prize (much the way Sky’s long-game played out over the last 25 years).
Until then, Amazon continues to trailblaze with the prescription of “jam tomorrow” for its investors. Let’s hope they are still young enough to enjoy the rewards downstream, just as installers should have a correct route planned.
Lifestyle business models are at odds with low margins and will inevitably decline.
I feel that Amazon can survive on these kind of margins / percentages because of their name itself. They have a reputation which automatically keeps them at the top but for new comers, its very difficult.
But really they are newcomers. OK, they’re the most established name in e-commerce, but they’re still newcomers in the grand scheme of things. Obviously though, the brand name helps! Is that the same in security? Do you need to be a known brand to be successful?
“Lifestyle business models are at odds with low margins and will inevitably decline.”
Well, that is what the author want to tell us. And prepare for it is better.
@Robert Brown: No you do not need to be a known brand to be successful but it helps if you are and makes things easier for you. That is the advantage of it.
Better to think about it now than when it’s become too late, though right?
@Robert Brown: In most case it is yes isn’t it Rob. No one would want to have a virus guard which has not proved anything or very few to the market. Same scenario applies to all mostly.