Pivoting to Services

In these turbulent, tariff-driven, market-uncertainty times, your clients may become reluctant to invest in large home technology projects now, thereby making your ongoing service revenue increasingly important to the long-term financial health of your custom installation business.

Custom home technology integrators are facing two threats that could jeopardize their long-term success:

• Low net promoter scores from home technology customers (i.e., unhappy clients)
• Low company valuations

The significance and impact of these threats warrant a much closer look at their cause, how they have emerged, and what the custom installation channel can do to successfully pivot their respective business models to mitigate these very real challenges.

I have used my experience as a custom installer for almost three decades, my contacts in the industry, and my recent experience with cyberManor’s one-year-old acquisition by Daisy to write a white paper to closely examine these two critical issues and suggest steps that our respective businesses can take to overcome these challenges. The entire white paper can be read here.

In my 25-plus years of writing numerous columns and white papers for our industry and teaching at tradeshows, I believe there are no more important topics to address than:

1. The challenge of improving our client’s appreciation and willingness to pay for all our smart home solutions and services, thereby significantly improving our net promoter scores.
2. Enhancing the valuation of our custom integrator companies.

Step One: Pivoting From Large Projects to a Service-Focused Business Model

The business model of the custom installer typically demands that we prioritize large projects over ongoing services to our clients. Our greatest expense (and monthly overhead) is employee salaries, rent, and insurance. The cost of these ongoing monthly expenses demands that we focus on closing large projects (with significant hardware and labor margins) on an ongoing basis to remain profitable.

Obviously, we service these projects to maintain customer satisfaction and loyalty. These services can cause stress on the limited manpower that we have to support projects. Larger custom integrators typically have a separate service department to alleviate that stress on resources, allowing them to provide a sustained focus on the long-term care of their clients. This generally leads to better customer satisfaction scores with existing clients, but new clients that call in for service (those that do not have a service contract) will typically have a more challenging service experience.

Third-party providers such as OneVision and Parasol have emerged to assist the custom installation channel to provide better client services. In addition, Control4 launched its Assist+ program to enable high-level remote Control4 customer support assistance. In 2023, Daisy launched a national program to provide new and existing custom integrators with a franchise opportunity to help them build a recurring revenue model for their businesses.

These third-party programs are effective and help fulfill the need to remotely resolve technical support issues in our clients’ smart homes. What they lack is the ability to provide on-site and proactive/advice support assistance — two key elements that significantly improve our client’s overall satisfaction and the NPS for our industry. Providing recurring relationship on-site technical support assistance, both reactively and proactively, is costly for most custom integrators.

No other topic has received more press in the custom integrator channel over the last decade than the topic of adding recurring revenue streams to our business models. The financial motivations are obvious:

1. The more recurring revenue you have, the less reliant your business is on signing new projects.
2. The greater your recurring revenue stream, the more valuable your business becomes to a potential investor.

Making this transition is difficult — very difficult — for all the reasons I outlined in my April 2024 Residential Systems column entitled “Recurring Revenue Gets Real.”

The need for servicing the smart home on an ongoing basis is paramount to the health of the custom integrator channel. When I started cyberManor in 1999, there were only two or three network-connected devices in the home: a couple of computers, a printer, and maybe a networked hard drive. Today, our average client has more than 30 connected devices in their home that they rely on daily for entertainment, comfort, communications, and security. In a post-Covid world, these network-connected services are no longer “nice-to-have” but are now a necessity. To work reliably and consistently day after day, these smart home products and services need to be maintained and updated on an ongoing basis. The custom integrator is in the best position to provide this support to their local clients. As the single point of contact for all the home’s installed technology, they are the professionals servicing the home with the acumen and skill to support all these networked products.

Step Two: Adding Long-Term Value to Your Business by Monetizing Your Customer Base

All businesses have clients. The value of any business is based on the revenue and profits of a given business. But all revenues and profits are not equal. The numbers may be the same, but the quality of those revenues and profits can be vastly different, and the quality of the revenue and profits will determine the real long-term value of a company.

Here’s an example: A custom integration company that does $2 million/year in project revenue with 10% profit per year is worth far less to an investor than a custom integration company that does $2 million/year in services revenue with 10% profit per year. Why?

From an investor’s perspective, they seek the highest return on investment with the least risk. A CI company that focuses primarily on project-based work is highly dependent on the principal maintaining the builder, trade, and client relationships that continue to bring in large CI projects. If something happens to the principal in that CI business (due to health, desire to retire, family issues, etc.), those businesses are in jeopardy of maintaining their ongoing project stream. This, in turn, would adversely affect their revenue and profitability, which is a risk very few outside investors are willing to take.

A custom integration company that realizes most of its revenue and profits from ongoing smart home services will be far less dependent on builder, trade, and client relationships — and more dependent on providing ongoing excellent service work for their clients. A far less risky ongoing revenue and profit environment, one where gross margins and profits are more predictable and recurring. In addition, the annual revenue will be made up of hundreds, if not thousands, of serviceable clients — which means the revenue base is spread across a large number of clients instead of just a few project-based clients. Hence, a much more stable, predictable, and profitable company. These are the financial characteristics that make this type of CI company much more attractive to potential buyers.

For more than three decades, our custom installation industry has thrived by leading with project opportunities, followed by ongoing excellent service, which leads to more new projects. But with net promoter scores from our clients hovering around four (out of 10), it is time to change that paradigm to one where excellent service leads to more projects, which leads to more excellent service. When a client is treated with ongoing exceptional service, they are more likely to give our industry a higher promoter score. It stands to reason that when we fix something that is broken in our clients’ homes or, even better, proactively repair items, our clients become thrilled with our companies.

As a principal in your custom home integration business, you have a choice to make:

• Do you want to put a majority of your limited personal and financial resources into growing your project business?
• Do you want to revisit the customers that you already have and develop a plan to monetize your customer base?

For the long-term value of your company, the latter option makes much greater financial sense. The reality of making this transition to a service-dominant CI company is difficult. Make no mistake, changing a CI business to lead with services that will lead to projects rather than the other way around is hard. It will take time, patience, and capital.

To delight your existing customer base and ensure that you will receive ongoing annual revenue from them, you need to add proactive and ongoing upgrade services to your current reactive service strategy. By making quarterly or semi-annual ongoing site visits to all your customers, you will ensure that you will maintain their ongoing service revenue, as well as plant the seeds for a continuous stream of home technology upgrades.

This is the future that our custom integrator channel should strive to attain. A future where services will lead to projects, where services will lead to enhanced company valuations, and a future where our clients will go from just being satisfied to being elated.