RMR: The 8th Wonder of the Security Business (Here’s Why Buyers Pay More)

Hosts Stephen Olmon and Collin Trimble go deep on recurring monthly revenue (RMR) in the security and fire-alarm industry—why it’s the heartbeat of the business, the biggest driver of valuation confidence, and the single most stabilizing force for operators trying to scale without cash-flow whiplash. They unpack how RMR smooths payroll, fuels growth investments, and answers the only question buyers ultimately care about: where is the next dollar coming from?

From there, the Alarm Masters partners get specific on what “great” actually looks like. They lay out the RMR-to-topline ratios they see across company sizes, explain why big projects can quietly distort your mix if you’re not squeezing every available recurring dollar, and clarify that even EBITDA-based deals live or die on the quality and density of RMR.

They also walk through the five major buckets of RMR—monitoring, software subscriptions, hardware-as-a-service, maintenance plans, and managed services—plus the real tradeoffs between margin and stickiness. Burg monitoring might throw off 65–75% gross profit but churns more. Cloud access/video subscriptions run lower margin yet can be sub-1% attrition because the hardware and software are inseparable. Their core message: win by being multi-service per account, stacking recurring layers until switching costs make churn irrational.

Finally, they bring it home with an operator’s playbook: your back office must be built to bill and offboard RMR cleanly, your techs must be trained so installs stay profitable, and your salespeople must be comped like RMR is the main product—because it is. If you want to hit the “mature business” benchmark, they give you the homework to map your current base, model your path to 50% RMR, and tighten your execution over the next 12–24 months.

✨ What You’ll Learn

• Why contracted RMR creates stability and higher valuation confidence
• The “golden” RMR mix by company size—and why 50% topline RMR is the maturity marker
• How big projects can tank your RMR ratio if you don’t engineer recurring dollars into every job
• The five buckets of RMR and how to prioritize them by margin vs. attrition

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Stephen Olmon — http://x.com/stephenolmon
Collin Trimble — https://x.com/TXAlarmGuy

More Entry & Exit — https://www.entryandexit.co/

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Chapters

• 0:00 Introduction to RMR: The Eighth Wonder of the World
• 0:54 Meet the Hosts: Steven and Colin
• 2:59 Valuation and Revenue Strategies
• 24:37 Exploring Residential Automation and Maintenance Plans
• 28:41 Commercial Hardware as a Service
• 32:55 Maximizing Recurring Monthly Revenue (RMR)

Transcript

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 RMR is definitely the eighth wonder of the world. When you have contracted RMR, it's pretty clear where a certain percentage of that revenue's gonna keep coming from. 

It's just like the primary operator of the business. It helps you sleep a lot better at night. 

If you have 50% of your top line as RMR, then you are very attractive.

It is easy to say, Hey, go sell more RMR, but if your business is not set up. To handle that, it doesn't matter. I would argue that at a minimum, 20 to 30% of the salesperson's comp should be tied to RR. 

Yeah. Amen.

Welcome to Entry and Exit. My name is Steven Ulman, and this is my co-host and business partner Colin Trimble. By day we run Alarm Masters in Houston, Texas, and by night we are extremely handsome podcast hosts that host entry and exit, where we try to give you practical, tactical advice on how to run and scale your security, your life safety business.

Today we are talking about, did you call it the eighth Wonder of the world? Is that what we're calling it? 

There's seven Wonders of the world. Okay. It's like, like pyramids and, yeah, all the things, whatever. I don't even, I don't know. I can't name all of 'em, but yeah, pyramids, we know those pyramids are for sure.

One, um, I'm trying to think of a second. I don't have it. Yeah, no, there's seven others or whatever, but RMR is definitely the eighth. Wonder of the world. 

We love it. RMR, um, is the heartbeat of our business. And it's something that we think about, not just from a valuation perspective, but just from an operational perspective.

Um, if you are in the security industry, um. The word RMR and the topic around RMR, it may be old hat to you because if you go to an industry conference, you can't even walk 20 feet into an industry conference without seeing RMR. Somewhere across that building or conference, RMR, recurring monthly revenue, which is.

A little bit of a misnomer because we don't always, actually less of our RMR is actually billed monthly. Most of it's billed annually or semi-annually, or even three or four years in advance. Um, but we are always thinking about what is that amortized RMR number? We're always thinking about the RMR number and.

There's a lot to talk about with RMR. Uh, we are gonna spend time talking about why it's important. I think a lot of folks that have been in the industry kind of know why it's important. Um, but we are gonna talk about different types of RMR ways to generate new RMR. We're also gonna talk about, um, some ways that, or some things we've experienced around, um, RMR that has higher attrition rates, some that has lower, talking about how to incentivize your salespeople.

Uh, and we're gonna give you some. Pretty tactical, or I guess I should say practical, uh, advice on how to generate more. And then also some specific numbers around like, Hey, what should you be looking for as you grow and scale? What should you comp your salespeople on? What percentage of the revenue? So we're gonna talk about all those topics, and we wanna make sure that this is relevant for everybody and that they feel like they're getting something and actionable that they can take away.

So we're gonna jump in. Um, and the first thing is just let's set the foundation, Steven benefits of having RMR. So, so talk to us a little bit. Obviously, you're kind of our m and a king. Talk to us a little bit about, um, valuations. Why, you know, a, a buyer would want. Higher amounts of RMR, what is that percentage?

That kind of golden standard. Talk to us about that. 

Uh, I'll also add in kind of the, the reoccurring side as well as we think about this, but we're, we're mainly, mainly focused on RMR today, the smaller end, you know, kinda lower end of the market. Are predominantly RMR transactions. Again, we've talked about in other episodes, RMR versus EBITDA based, uh, transactions and valuations.

And so typically what you see on the lower end of the market, and let's say that's a business that's worth less than $2 million, something like that. Um, there, there's no kind of perfect answer for that. There's some different scenarios, which we'll talk through, different circumstances, but lower end of the market.

Um, maybe you're doing one to 2 million top line. You've got some RMR, typically an RMR transaction. And the higher the RMR, the more confidence. You know, we talk a lot about where the next dollar is coming from or predictable revenue. And so when you have contracted RMR, it's pretty clear where. A certain percentage of that revenue is gonna keep coming from, right.

We also want to think about churn and like what, what sort of, uh, attrition that you might have in your business. And so ultimately, RMR is going to give someone more confidence. The higher the RMR as a ratio of your total revenue, the higher certainty, your confidence someone has in paying a strong multiple, which oftentimes on the commercial side is kind of in that.

35 to 40, maybe low forties, depending on what the mix is on the RMR, um, as a multiple. And then in residential, unless it's a really large book of residential, RMR, you're typically a little bit lower. You know, kind of low to mid thirties on that multiple. On the residential side, again, there's always outliers, there's always certain circumstances, but, um, that recurring revenue just gives buyers confidence.

And, um, and that's from an m and a perspective. We'll talk about this more obviously from an operational seat, it smooths out. Your financial life. Um, so we'll, we'll talk about that in more detail in a bit. Um, the last thing I'll add, I mentioned briefly kind of reoccurring. We talk about that as well. And ultimately what you are, uh, generating from your customers on a repeat reoccurring basis also can kind of add into that overall level of confidence a buyer.

Might have. 

Yeah, I think that's great. I think you touched on a lot from an m and a valuation perspective. We are focused here on, uh, recurring RMR, not reoccurring revenue, which we, we do talk about both of those things. So we're mostly talking about subscriptions, um, that are involved in the security industry.

Um. But both is important and we know we did a podcast on, uh, service and why that's also incredibly important. But today we're focused on that rmrs, uh, the sweet suite, RMR. And also, you know, when you talk about m and a value, there's a ton of value as just like the primary operator of the business. Uh, it, it helps you sleep a lot better at night when over 50% of your business is RR, um, because that is the thing that smooths out, um, the kind of hills and valleys of a business.

It makes you a little less, uh, cyclical and allows you to budget a little more tightly. Um, and you know, we've talked about this a lot that like when you're buying a business, the thing that a buyer wants to know is where is that next dollar coming from? Do you have some type of predictable. Revenue stream.

That's, that's the most valuable thing in a business, right? It's like, do you have the most predictable revenue stream and arm R is that it's contracted usually under multi-year agreements, and it's typically low attrition, and you get other things out of those customers. You become their kind of point person for security.

Security or fire. And so for me, um, it helps me. When I think about staffing and growth investments, when we're thinking about what we're gonna spend, I'm looking at our growth rates for RMR. And so, yeah, I care a whole lot about m and a and I care about the value and our enterprise value, and that's important to me.

But what I'm focused on is the here and the now and the here and the now. Colin cares a whole lot about having stability in my business. I, I wanna make sure I'm hitting payroll and never delaying, I'm making sure we're paying all our vendors on time and we have enough cash left over to make investments in our business.

So I think. Ensuring that you have that stability comes from our mark. So, so I think we've. Spent a decent amount of time here, and I think probably everybody gets why RMR is important. This is a, a huge reason why when you rewind the clock that Steven and I spent, um, so much time on the whiteboard looking at industries that we wanted to buy, and I was sold out on security.

As you know, we would sit and have conversations with our friends who were buying. Other businesses in plumbing or HVAC or roofing or whatever, and they would talk about, you know, these membership agreements that they had and 10 or 15% of their revenue was coming from maybe, yeah. At at best was coming from RMR.

They were through, you know, they were over the moon about that. They were bragging about that. And I just remember being, you know, kind of in this industry, tangentially as a manufacturer rep, realizing man, I had to knew a lot of guys that were at 40, 50, 60% of the revenue was recurring. Um, and, and so that is something that we love about this industry.

Um, and obviously I think, you know, we could talk about. The value of it tore blue in the face, but we wanna spend some time on some more practical things. Um, one thing is, hey, what percentage of your business, Steven, do you think, uh, we'll say, give us, give us some kind of like, Hey, I'm a smaller business.

I'm sub, you know, 3 million. I'm a medium sized business, kind of five to 10 million, and I'm a larger business. You know, 10, 15 million plus in revenue. What, what do you think from a percentage they should be, um, you look at a ton of businesses, what are you seeing out there from a valuation perspective and, and a mix?

Yeah, so I, I'll actually, uh, skip to, you know, the, the golden answer, which is. If you have 50% of your top line, uh, as RMR, then you are very attractive and you would be seen as very mature. Now, the lower end of the market, you're growing, you're making investments, you're, you're probably, um, doing some work that maybe isn't scalable, that you wouldn't necessarily do it in the exact same way in the future, but you're just kind of taking the dollars you can find.

If that 20 to 35% range, like you would see pretty common that next rung, you know, you're kind of three to five, three to 7 million top line. Ideally, if you're being intentional, you're starting to inch towards kinda that 40 plus percent mark, and then at full blown maturity, I'll say kind of 10 plus million.

In terms of being, kind of maximizing your value and your revenue, it's, which, that's actually the thing is, okay, if it's 50%, what's the other side of the house? Mm-hmm. You know, we think of it as probably app maturity is somewhere in the 50% RMR, 15 to 20% service, and the rest is kind of, you know, install project type work.

So. Um, those are the types of percentages that mature strategics, or mature financial buyers are gonna be looking at. 

Yeah. I'll say this, I, I have a lot of friends in the, in the industry of various sizes and have seen the life cycle of a lot of my friends' businesses that they've kind of started or take, taken over and then grown and then ultimately sold.

And what I've seen is a lot of folks, you know, in the kind of two, three, 4 million range, you know, 50% of the revenue being RMR is. Pretty easy. I would say it is natural. They're doing smaller project sizes, a lot of service work, RMR. But then once they happen, what happens is they take on these larger, um.

Projects. And these larger projects are not the same ratio of install dollars to RMR dollars that they've historically done. So, yay, we're excited for you. You're doing, uh, larger projects. Um, you shouldn't not do larger projects, uh, to just, just to keep your ratio down. But what you should be doing is if you're gonna do larger projects, uh, you should be driving and trying to find ways.

To squeeze out every dollar of RMR from every one of those projects and all of your additional customers as well, because it's sort of like, it's two sides of the coin, right? Like you're super excited, you're growing this revenue, but ultimately that mix matters. Like it matters whenever you want to sell that business.

So you know, you don't, what you don't want to say when you're in m and a discussion is, yeah, I've got all this, you know, RMR, but I just had these two really big projects that are outsizing my revenue, like. You don't wanna highlight that, right? Like what you wanna highlight is I've got both, I've got, you know, 40 to 50% of my revenue is RMR, and also I've got a ton of project work.

Um, and so I think the closer you can stay in that band of 40 to 60% is huge. I, I will say this as. If, if, if you are in the, like, on the lower end of that band or if you're at 35 or 40%, if you have a lot of service work and inspections and you're picking up, you know, managed, um, managed service agreements and things like that, um, you get a little bit of grace.

'cause that's reoccurring revenue, which would be the, maybe the ninth Wonder if you're a a. Mm-hmm. M and a guy. Um. So, so that you do get a little bit of a, a pass. So what I would say is always be focusing on that RMR 'cause that's really important, but then also just know that you can, you can kind of bridge the gap, if you will, by having some reoccurring revenue as well.

Um, also, I just wanna make one thing. Kind of clear, which is we talk a lot about two ways that you can value a business, generally speaking. And there's blends of these two is one is on Arm Mar and one is on ebitda. Even if you are selling on an EBITDA transaction, which if you're, you know, over half a million dollars of ebitda, you're, you, you likely would sell, uh, on a, on a, uh, EBITDA valuation.

That's still just as important. It doesn't, it doesn't mean it's less important. Like when we look at businesses right now. That are between, you know, half a million, a million dollars of ebitda. The first question we ask is, how much RMR do you have? And we met with a co, a couple companies, and they, uh, were seven 50 of ebitda, but they had $5,000 of RMR.

And that just wasn't a fit for us. That wasn't exciting to us. And they had some decent service, but it was mostly project work. And for us, that was not a fit. That was not what we were looking for. And I think a lot of. Buyers, um, probably would agree with some, a similar sentiment. So just wanna highlight that, that even if you're planning to sell on ebitda, you still have to have, or you should still have a, a high degree of that RMR revenue.

Any additional thoughts on kind of percentages of RMR relative to revenue, uh, before we move on to, to, uh, kind of types of RMR, which I wanna park out here for a little bit, but any, any more thoughts, Steven, before we move on? 

No, I, I think we can go on to types of RMR and one of the things I wanna make sure we touch on.

Is margin related to those different types of RMR? Because Yeah, you and I both have software backgrounds and so we were spoiled. You know, I came in a past life working in a software business where gross margins were high seventies. Percentile, you know, 75, 80%, which is pretty standard in software land.

And you talk to anyone else in any other industry, and they're instantly jealous when you compare margins. Right? Um, because not all revenue is created equally. Mm-hmm. Meaning, you know, the underlying margin. My friend that sells tens of millions of dollars of aluminum every year, well, his margins are tiny.

It's a commodity, right? So. We came from a place of really respecting and enjoying the reality of super high gross margin services software as a service. Yeah. One of the things that was attractive to me when we go back to that whiteboard story years ago is that there's also pretty high margin found in some of not all, which is the point.

Some of you know these types of RMR, and so you kind of have to wade through those waters and really think about, yeah. What you're selling, what that means from the bottom line. So yeah, that's, that's my, uh, that's kind of my entry into the next segment. 

Yeah, I think that's great. But my, my, my entry into the next segment, or my preview is, um.

It is easy to say, Hey, go sell more RMR. Here are the various ways to sell RMR, but if your business is not set up to handle that, 

yeah, 

it doesn't matter. We meet with a lot of owners that say, yeah, I've got 10,000 of RMR, but I'm doing 5 million a year in top line revenue. A lot of these projects and I probably could go capture more Mr.

But I don't, I'm not set up for it. It's kind of a pain in my billing system. We don't really like have that. Figured out it's annoying. I don't know, like how to make sure I'm not taking 'em offline. So I've got a lot of customers I'm still paying for. They don't have good, uh, thorough cancellation policies.

I, I just wanna highlight that. Hey. That first step you should do. I mean, we're, we're, we lead with revenue, so we're always gonna say, go sell it. But you should also be thinking about those processes. Is your technology set up today to be able to handle, um, your billing technology to handle recurring revenue?

Is it intuitive? Do you, could you create a, a checklist in 45 seconds for if you're gonna do. You know, whatever burglar alarm monitoring, can you have the checklist of how to take it off in the cellular communicator, how to take it off in the monitoring station, how to take it offline in your billing platform, how to document all that.

Make sure you got a customer letter. I mean, you, you need all of that. Um, and so I, I would just wanna recognize that it's not just a matter of selling, uh, there's some back office kind of, uh, adjustments that have to be made. And also there's adjustments, particularly when you're selling cloud-based technology, when you've sold on-prem tech.

Yep. Where your technicians are. Probably not trained in that. And so you've gotta think about your training costs. So there is a little bit of an investment to, if you're really coming from a world of doing more project-based work, or even if you are just doing alarm monitoring and you wanna explore into like video surveillance that has RMR tied to it, you're gonna have to train those technicians and.

I think one thing that we hear from a lot of owners when we meet with them that don't have a lot of RMR and it, and it, it hurts to hear 'em say it because it's like, man, it doesn't really matter. Say, oh, well I've got all these customers. I could just go in there today, you know, you know, and go start selling 'em RMR services.

And it's like, well man, why haven't you done that? Like, you don't get, you don't really get a lot of value on your business for what could be. You get a lot of value for what has been, and you have to really focus on that today and start building a track record. One thing that does provide value is if you can show year over year growth on a strategy.

So if you start rolling out cloud video surveillance and access control and fire and man service, all these other things. If you can show a path and you can show a track record, Hey, I just started doing this a year ago, but look at my month over month growth. You do get credit for that, but you really have to show that you can't just talk about it.

You can't just talk about a plan. You've gotta have a track record of, you know, nine to 18 months of. Of history there. So, um, there is a lot of different types of, of recurring revenue that exists out there. And, and we are so passionate about it and we're still not taking advantage of every single one of them.

And so I want to go through some different types. Um, there's some buckets of RMR. I'm gonna, I'm gonna bucket them into five buckets. I think just, there's probably even more than that and I'll probably think of more as I'm going through it. But the first one is, is really the easiest or kind of most basic that everyone's aware of, which is monitoring.

So that would be your intrusion alarm, AKA berg, your fire alarm, video monitoring. Video verification. Uh, that's tied to your intrusion alarm. Environmental monitoring, not as common, but more common for industrial applications, like when you're monitoring, um, uh, for humidity or temperature or whatever. We have some of those applications.

Um, so those would be monitoring and. I just wanna stop here for a second to say these. We're gonna combine these two sections here. 'cause these have probably the highest gross profit margin of any of the rmrs that are offered out there. You know, you're looking at 65 to 70, maybe 75% gross profit margins is great.

How. It has the highest attrition rate. Now, video monitoring is kind of an anomalous there, fire alarm, a a little bit anomalous, but burglar alarm is the most, uh, or is just characterized by having the most attrition. There's so many people that offer it and um, it's not very sticky. Um, there are things you can do to make yourself as a business sticky, but just in general, as an industry intrusion alarm is, has the most churn.

And so it was interesting when we bought ALARM Masters, um. The owner was doing fire alarm in Berg but didn't have any other RMR, so they were selling access control. They were selling, you know, video surveillance. They were selling fire alarm installations, but they didn't have. Their inspections locked up in RMR.

They didn't, they really didn't have any forms of RR except for that berg. And so we've, we've injected a lot of different streams here, including video monitoring, video verification, some environmental applications. The next one is the second biggest bucket, at least for ALARM masters, which is software subscriptions.

So these are primarily cloud managed access control. And video. Um, and, and, and kind of a subcategory of this, I'd really put this in the monitoring bucket, which would be like cellular providers, so alarm.com, berg system. But that's kind of tied with monitoring. Although it is a software subscription, it's kind of tied with the monitoring, but the software subscriptions is the biggest unlock for us.

This is how we effectively doubled our RMR in a single year. Was. When we bought Alarm Masters is we started selling cloud-based access control, um, and video surveillance. And we basically shifted the entire culture of the business to say, we will not sell an application, um, that does not have cloud-based access or cloud-based video.

And that wasn't just because. We wanted to improve our RMR economics, which it helped, but we just fundamentally believe that those products are the best and kind of are the future of the industry there. Even within those buckets, there's add-ons. So like for example, you could sell a camera for 10 bucks a month for cloud storage, but then there's.

Um, add on applications for health monitoring of that camera to tell you, Hey, is this camera about to go out? So you could provide health statistics to your customer and be proactive. That's usually about two bucks a month to the customer per camera. Uh, and it's massive value. 'cause it starts to tell them, Hey, we think there's something going on with this camera.

You're probably gonna lose this camera in the next three to four months. Man, that is a powerful tool for your customers. Another one is analytics. Um, we offer something. That is BA is basically called AI monitoring and, and it's what it is, is it's. Really detailed. Uh, it's an age agentic layer that sits upon the video to basically do, uh, self video monitoring.

So instead of it going to the monitoring center, it comes to your phone to say, Hey, we detected a person, an anomalous person in this area doing something. You should look at this and decide if you want to dispatch to authorities. It is way more robust than a standard motion alert. So it's really filtering that out and giving you kind of true events.

Um, and it, it also. We'll talk down to the person. So it'll say, Hey, you know, hey, you in the black hoodie. You know, we see you. We're gonna call the authorities. And that's all just the agentic, Larry, I'm talking to you. Um, so there's a lot of really great analytics with that. On the access control side, they have very similar analytics.

And there's also, I mean, guys, you could go deep on this. We have customers that have API subscription, so they're paying to integrate their, um, access control and their video surveillance into their active directory or their Azure, you know. People management layer. And that's important to them. So if you're not offering that, you should, A lot of customer, a lot of companies would totally kill for that.

That's a subscription they're willing to pay 50 bucks a month for, so they don't have to manage multiple databases. So within the software bucket. Man, there is so many different licenses and SKUs that you can sell to generate additional RMR. So I'm gonna pause for a second. Steve, do you have any additional thoughts on either one of those?

Any, any kind of anecdotes that you've seen that I'm missing over the course of our business? 

Not specifically one. One thing we haven't really talked about, because we are really commercially focused, I know, we know that people that are more focused residentially. Listen to the podcast and we still do serve, you know, roughly 15 to 20% on the resi side.

So I think just to probably should quickly touch on the resi side as it relates to some of this too. 

Yeah, great. Call out. Um, it's true. So there's a lot you can do on home automation. We, we. Yeah, personally don't do a tremendous amount of home automation. We do a little bit, um, where we do home automation is primarily, um, with, you know, some additional outlets, some like garage door opener, stuff like that.

But we're not really doing locks. Um, you can do locks. That's a kind of a common one. We also do a lot of cameras in residential applications, pool alarms. Um, there's a bunch of different ways in the resi side that you can generate additional, but the, I think the biggest one, which is something we're about to talk about in a little bit, is maintenance plans.

Man, I'm, I'm a sucker for a maintenance plan and it's actually helped me. I've got a mosquito misting system. Shout out to Houston, Texas, the swamp. And we get mosquitoes. The size of horses out here, man, these things. And they're year round. Okay. Because we don't, we don't get cold enough to kill those little guys.

So we have a mosquito misting system around our entire backyard, and inherently it just. It, it gets screwed up. Like the nozzle needs to be replaced, whatever. So I have a, I have a maintenance, you know, deal with the, the guys that installed it and it's like a, I just text them, Hey, this thing's jacked up.

Come fix it. And they come out, you know, two days later they fix it. There's no bill. I don't think about it. I don't even have to worry about it. I don't even care what it is. 'cause I'm not trying to fix it. I just say, come out here and please fix the thing. And they do and they replace the parts. It's kind of a unlimited service model.

So I think to me, I think all the home automation stuff is great. Uh, we don't touch av, that's a whole world that a lot of resi alarm companies are focused on, that you could really dive in deep on. But we don't. So we're more geared around that kind of video and alarm side for the, for the, uh, home. 

One other quick note.

We didn't touch on this earlier, so I wanna go back to it on Resi is we see a lot of kind of majority or 100% resi focused businesses will try to compete because it is really challenging, especially in large markets, like with sophisticated competitors, big budgets that people will market, no contract required.

Yeah, and that's a really important decision. And so I understand if you're really early or even considering about trying to greenfield like a resi alarm company, I get the logic behind offering like no contract required. Obviously it's a huge mistake if you ever want to try to sell from like an enterprise value perspective, so that's something that we didn't touch on.

Earlier that I just think is material. And I don't know if people necessarily think about the, with the end in mind. And so they just try to compete in a market and sling, sling that, and then years later may really regret it. So that's something to just, you know, uh, maybe just pray about, you know? Yeah, maybe just think about it.

It's true. 'cause there's a whole world that we don't offer, which is leasing the equipment. Now we do offer hardware as a service in the commercial side. Different model, uh, and we'll talk about that. Um, in fact, we're gonna talk about that in our next segment or our next bullet here, but you're absolutely right.

Leasing in the resol residential space, huge like that. That is if you're almost, if you're a pure resi company, almost. You know, greater than 50% of your equipment is all leased. So it's like a hundred dollars down or whatever, and 50 bucks a month or whatever the, the deal is. And so that's a whole different world that RMR is valued differently by the way.

So if you are thinking about doing that model, um, just know there is some valuation considerations associated with that that are not necessarily advantageous. So you just have to kind of think about your long-term and what your long-term game is and align that with. With what you're doing today, right?

It's kinda what we're talking about all the time. It's like whatever your long term, you gotta think about the end in mind. Even if the end in mind is handing this business off to one of your children or whatever, you gotta be thinking about the end in mind. 'cause you wanna set them up for success. So you want to build a company that's gotta a solid foundation.

So yeah. Great, great call out. I wanna talk about hardware as a service. So this is, this truly is mostly focused on, um, you know, on that. Commercial side. And what we're really trying to think about here is you can sell, so I'll use an example. So you can sell a video surveillance system that's, you know, 10 cameras, it's whatever, 10, $12,000 up front, and then you've got, you know, a hundred bucks a month, whatever you, there is also a way a lot of the manufacturers do something where it's hardware as a service where effectively.

They will give you the camera subscription and all of the hardware under a subscription. So you still have to charge the customer labor. But it's, it would be effectively like, you know, instead of being that 10,000 or 12,000 up front, it's like three or four or 5,000 up front, but then it's like. 400 bucks a month.

So there's a cost equation you have to do there, but we have a lot of customers more than you would think that are actually interested in that because there are some benefits to it. Number one, it price locks the customer, uh, to whatever the current subscription rate is. So when subscription rates go up, which they do from the manufacturer, um, you're protected.

Also, it has an unlimited warranty. So, um, anytime the material, you know, if the equipment fails, it's, it's just a swap out really fast. And if at end of life's they give you the brand new product. Um, and so that is advantageous to a lot of customers who are just thinking long term, like, I don't wanna think about this, I don't wanna mess with it.

Just like, do the thing, you know, just pay the subscription. So that is one where we have a lot of customers, especially on the smaller end. I would say once you get over. You know, 10 or 15 cameras, you're probably, they're gonna wanna probably buy it outright. But the hardware as a service thing is really great.

It's, you have to distinguish that with the customer and say, Hey, this is not leasing, but it is a great way to get additional recurring revenue. So what we try to do, uh, and we're actually building our quoting platform to do this automatically for us, is it'll give you the customer two options. So it's gonna give them an upfront purchase and our hardware as a service option to kind of incentivize them and push them more towards that.

So. Hardware as a service is another bucket. Another bucket. This is kind of, there's like a sub bucket of like other stuff that's kind of associated with monitoring. A big one would be guard response or private patrol add-on. And so this would be, you know, something like instead of the monitoring center calling the police, immediately they would call, um.

A guard service and that guard service would come out and dispatch to, to clear the call. 'cause 78% or whatever are false alarms. And so that is a really big one that I think a lot of customers are focused on. And there's just other stuff in this bucket too. I'd probably throw a video. I, I know I talked about video verification earlier.

I think I probably throw that in this bucket. There's open and closed signals. Um, there's a bunch of like random monitoring kind of. Services that are offered that you could kind of drop into this bucket. So those are offered. We don't do guard well, we do we, but we don't push it a lot. Guard response is another great way if you're really focused as a classic alarm company to generate RMR.

We just aren't pushing it a lot, but maybe we should. Another one is maintenance plans, which is different than managed service. So I. And sometimes they're kind of mixed together. So maintenance plans would be like preventative maintenance or extended warranties or annual testing. So that would be, Hey, I've got a fire alarm.

Instead of paying time and material for 600 bucks a year, whenever it comes up, I just pay 40 bucks a month. And. You guys come out, you do the inspection and you send that. So that's, I would highly recommend you're locking up all of your inspections under, uh, uh, under a subscription agreement. It, it is valued differently.

Just so you know, like if you're a smaller business, they're gonna piecemeal that out, probably value it slightly less. But if you're a bigger company and you're over a hundred thousand of RMR, they're likely not unless it outs, it's an outsized portion of your RMR, they're, they're gonna value it.

Generally the same, but then preventative maintenance. We love that. We've been pushing that really big the last, the last year, and that was an example of one where we actually had customers asking us for it, but we were not set up for that as a, as a company to be able to honor that. And we were passing up on sales, which killed me.

As a sales guy, but I just, we, I knew we couldn't handle it. Extended warranties, uh, that is bigger in the AV space. Uh, a little bit of that here in the security side, especially on, on-prem technology when you're buying a lot of equipment, not quite as big in the software side. The last bucket is managed services.

So managed services would be, um. Sometimes it's combined with maintenance, but a lot of times it'd be like, Hey, for access control, the customer doesn't wanna think about adding and deleting cards, uh, or changing schedules or whatever. So they just email you and they say, Hey, I need to add a new card.

Great. You add the card, you mail it to 'em, drop in the mail. They got a new card in a week cut. Person's added, Hey, this person left. Okay, great. We canceled the card, send it back to us, or put it in a drawer and let us know and we'll re-add that into the bank. So. That's like managing their access control for them.

There's a little bit of that on video too. I want to add into the users. I want you to pull this footage for me. I want you to surface certain clips that I need to see, so that's an option. Uh, device health, managing the device health, that's a big part of. Top tier managed services where you can, we talked about this earlier, you can get analytics to tell you the health of the system and um, and even preventative maintenance.

Like I I I'm telling you, one big thing that we push a lot for our customers that have access control is, Hey, let us come out once a year. We're gonna test your system. We're gonna test all the connections. We're gonna make sure all the locks are firing correctly. We're gonna make sure everything is working great.

We're gonna blow off the fans on the back of the panel, you know, all the stuff that people don't do. Like we're doing that. So those are kind of some bigger buckets. Steven, anything you wanted to add to that? These are all, they all kind of have, you know, different pros and cons. Um, but yeah, I think it's kind of a all encompassing list.

I just remember the, we, we were looking at a, a pretty large deal that it didn't end up working out. And they had an incredible amount of managed services, revenue. And at the time, at the time you and I were like, what in the world? Like mm-hmm. As a ratio, like we didn't even really fully appreciate that that was achievable.

Yeah. As like how much they were doing there. And. Like within that specific service, and it was kinda eye-opening. It's like, man, we, we really need to think about this more in our own business. 

Yeah, no doubt. Totally agree. Um, one thing I wanna add is just I wanna touch on, um, which of these have high attrition and which of these have low attrition?

So Berg is gonna have, uh, pretty significant attri. Fire alarm is not high attrition. It's historically low to medium, but where you're gonna have really low attrition is on things like software subscriptions around access control and video, because. They are tied. The, the hardware and the software are inextricably linked.

So if they're buying a, um, an access control system that is cloud, they can't use the hardware without the cloud subscription. It's pretty low attrition, it's got lower margins, so cloud subscriptions are gonna be more like 50%, 40%, sometimes 25% gross profit margin, so significantly lower gross profit. But.

The trade off is they're sticky. I mean, you're, you're gonna have like less than 1% attrition. I mean that, at least that's our experience. 

I think the most salient point to make is being multi-service. Yeah. Within an account. Mm-hmm. Also, it kind of has a, an additional impact from a stickiness perspective.

It's just classic switching costs, you know, and, and paying around that, that if you are, you know, you have 2, 3, 4 different services inside an account. It's even less likely to churn. And so, um, that was a, it was, and still is a big focus for us. Yeah. I believe that the average when we bought alarm masters was like under 1.5 services per commercial account.

Mm-hmm. 

Is that right? I think we were like 1.3. Yeah. Services per commercial account or something. And so our goal has been to get above 2.5. Yeah. You know, 2.5 to three. Um, because that's going to lead to kind of the. Attrition mitigation. 

Another attrition mitigation tool. A lot of, most of our listeners know if they're in the industry is your contract structure.

You can do multi-year contracts. Most commercial clients are not gonna care about multi-year agreements, especially on access control and video for intrusion and fire alarm. They're gonna care. It's kinda a funny deal. Like we have a, we have a key customer who's been our customer for 35 years and they signed a new agreement for a new location, and they were like, yeah, we want a one year agreement.

And it's like, oh, are you thinking about going anywhere? Like, no. No, we love you guys. We we're not going anywhere. Uh, but we want a one year agreement. I'm like, okay, well that doesn't totally align, but hey, sure. And, and we as a company, we are totally good with one year agreements. Um, we main, you know, we make sure it's at least a one year, but, uh, a lot of folks are pushing three in five years.

And, and that in the commercial space, you can get away with that three and five year agreements. Great way to keep your attrition low for, for your article. And we've 

also bought chunks of accounts with lots and lots of three year agreements too. 

Yep. One thing that I just wanna note related to that, I don't think we talked about this in the m and a episode, and actually a broker told us this, that was, it was actually pretty wise, which is, Hey, I would rather buy a, uh, I'd rather buy a, uh, a block of accounts.

That has seasoned customers that have gone outside of their three year initial term, and now they're on month to month. Then a bunch of customers that are all locked up under their first term. Yeah, and the thought process is if they've already gone through that initial contract. They're now month to month, they're obviously happy with you because they're, they're paying and they have no, they don't have to stay with you.

Right? And so I think that's an interesting thing to think about whenever you're looking at other companies is what percentage of them are on month to month versus one or three years. Another way you could look at that is what is the age of the account, uh, kind of cross-referenced to the billing length.

So anyway, just kind of a interesting note. 

Well, and it, it's when you're evaluating an acquisition, but it's also. A way to evaluate your own existing accounts internally. That's right. Yeah, it's both. 

Um, okay, so let's talk salespeople real quick. So if you want to take this serious, um, you have to make sure it's serious with your We talked operational team has to be prepared and your sales team has to be prepared.

So I wanna touch quickly on the operational side. So yes, you gotta have the billing set up. You have to get your team set. If your operations, people hate installing it and it. It's, uh, losing you money or it's bleeding gross profit dollars. You are not gonna be motivated as an owner to continue to support that product.

But the reality is, your team is undertrained. So highly advise you if you're gonna take subscription serious, make sure it's thoughtfully rolled out and your team is trained up on it so that when they go do these installations, they're not behind. Uh, and they're not feeling stressed about knowing how to install it, and you're, you can keep your gross profit high on the salesperson.

You need to comp your salespeople significantly to be able to do RMR. And there's some nuances with it that I didn't appreciate until a couple years in. I would argue that at a minimum, 20 to 30% of the salesperson's comp at a minimum should be tied. To rmr. Yeah. Amen. If you're gonna take it serious, your salespeople have to be paid on it, and it has to be a quota and a comp.

If it's not, if it's not a quota and a comp, like you got, those are two separate things, right? Like I, we comp some of our sales guys on things that we don't, they don't have a quota for it. Like, for example, we have a new logo bonus, so we give our guys, uh, a, a little spot bonus for every new logo they bring on, but there's not a quota for that.

You need to have both. You've gotta have a quota of X number of RMR tied to, uh, install. That's harder to do in your first year when you don't have a ratio. So what we look at is we look at the average size deal and the amount of average RMR that comes with that deal, and it gives me a percentage ratio.

And so whatever I want my. Revenue, uh, my installation quota to be for my salesperson. Then I, you know, extrapolate that to say, this is what the kind of comparative RMR quota is for that. So theoretically, if they're selling. The install and they're picking the right services that have the associated RMR, then it's gonna be in there.

The other thing is just creating the culture for your salespeople. There are, believe it or not, people out there that say, Hey, I don't want to pay a subscription, even when they know the technology is better. They've got subscription fatigue, so do I, but it's just where we are as a society. Actually, I have tipping fatigue.

I, I, I, I can, I have tipping fatigue when I go up and there's like a, you're at Jersey Mike's and it's like the person makes the sandwich and you're checking out at the little iPad. I'm like, I'm not tipping the iPad anyway. Uh, people have subscription fatigue, and so you've gotta build the sales team with the objection handling to be able to overcome that and help educate the customers on, Hey, this is, this is why this matters.

And you want a subscription, and it mutually aligns us. And anyway, we could. We could dive into all that, but, um, you've gotta have incentives for the team to do RMR. Give them specific spiffs when you're rolling out a new manufacturer, if you're serious about a new manufacturer that has more RMR associated with it, um, you've got a lot of people to train.

Um, so you gotta take ownership of that. As an owner, probably depending on the size of your business. So you've gotta get that operation team tied up. You gotta get the billing team, the customer success team. You gotta get the salespeople trained up so they know how to do the feature selling and the quoting.

Um, so there's a lot when you're thinking about bringing those on. But I think the biggest thing is just aligning your salesperson's comp to RMR, um, because it's a huge piece of, another, another consideration that you have to think about is, uh, if they're gonna do hardware as a service, how are they gonna count that?

Is that gonna be counted as satisfying an installation quota or is that gonna be satisfying an RMR quota? At alarm Masters, we give them the option so they can satisfy the RMR quota and get paid as RMR or they can convert that to what it would've been as an install and get paid on install. It kind of depends on how they wanna apply it.

Most of the time they do it as RMR 'cause it's significantly adv advantageous for them. Anyway. I just, I wanted to highlight that because I think a lot of folks make the mistake of. Yeah. You know, we, we started, we signed up with Eagle Eye and Ada and all these different companies, but I just can't get my salespeople to sell it.

It's like, well, they're probably not trained and they're probably not incentivized. 

The last thing I'll add to that is like the psychology of that sale. When I was a young salesperson, sometimes I had a hard time. Understanding why my leadership team wanted me to sell something. And so even the breaking down the value of RMR for your team, like.

From an enterprise value perspective, just for them having a, a little bit of, uh, clarity and understanding of why you are so motivated, uh, for them to sell that. Like if they don't know, especially if they're coming from outside the industry. Yeah, which we've done quite a bit, is explaining the value, obviously recurring revenue, generically speaking to someone that understands businesses.

A cool concept. Like, okay, that's neat, but why are you paying me so much for it? Why? Why is this 20 to 30% of my comm? Can you explain that? Yeah. Because the numbers are smaller, right? Like Yeah, big install project, big number. Yeah. RMR, smaller number. Why is, why? So I just think kind of explaining that and talking through it almost as, yeah, a part of training.

Is important. 

Yeah, I agree. Give them the why. Help 'em understand the why. Yeah, I totally agree with that. That's, that's really important. Um, I wanna jump into some homework real quick, uh, for everybody. So if you're serious about, uh, pushing RMR in your business and you're really gonna try to get to that 50% goal, the first thing I would do is map out, we gave you some buckets.

I would go back and map out who your software providers are today, what their RMR is, and I would build a small kind of business plan light that would be like, Hey, here's what I'd have to sell to get to 50% in the next. 24 months or 12 months or whatever goal you wanna set for yourself, work backwards on how much you'd have to add and then like.

Figure out is that even achievable for you? Are you gonna have to hire salespeople? So I would start with that business plan. And then the next thing I would do, go sign up for some manufacturers and start replacing those on-prem systems. Uh, and get your salespeople spiffed on it. Get your, right now, the end of the year is a great time.

You're probably looking at comp plans for your salespeople. You're probably training, spending more training time with your, with your install team. So I would say start with the business plan, then get some manufacturers on if you guys have any questions. Like I just answered a question from a guy in the Nordics.

Crazy. Our podcast landed all the way up into the Nordics and he was asking me questions about, um, RMR versus hardware install. And so anyway, um, we love to help. We love to be a resource. If there's anything we can do, let us know. As always, please like and subscribe. Give us a review on your favorite podcast app.

That would be helpful. Uh, we'd really appreciate it. Thanks.