Editor-in-Chief of Security Sales & Integration Scott Goldfine talks with President and Founder Chris Johnson about SafeMart and the home security industry as a whole.

SG: Welcome to security sales and integration, security speaking podcast. I’m Scott Goldfine (“SG”), Editor and Chief of SSI. I thank you for listening as each week we discuss the trends, issues, opportunities, challenges, technologies and more, affecting today’s electronic, security industry professional. My guest today is Chris Johnson (“CJ”), President and founder of St. Mary’s, Kansas based SafeMart Home Security. SafeMart markets its Plug & Protect™ wireless alarm system and LiveWatch alarm monitoring service to both residential and commercial customers. Having made the Inc. 5000 list of fastest growing companies, consecutively from 2009 to 2011, the company focuses on providing professional grade security at lower costs. With customer-installed solutions spanning security and surveillance. Chris, thank you so much for joining me today.

CJ: No problem, thanks for having me Scott.

SG: Now Chris, if I come to you as a home owner looking for a system, why should I go with SafeMart as opposed to a large national provider like ADT, or a similar local or regional company offering complete installation services?

CJ: Well I think the answer to that may be two different parts. Let me just start by saying, at SafeMart when we deliver our LiveWatch security services and then the alarm equipment that enables those services, we are focused on making sure that our customers are well covered, as opposed to say, “minimal coverage,” just to get a contract. On the other side of the coin, we try not to sell anything that the customer doesn’t need. It’s kind of a unique sales approach in an industry that is known to operate kind of on both extremes. There are some local and regional companies that do a fantastic job. A lot of companies that I’ve had the pleasure of interacting with over the past few years where I think that we actually appreciate good competition. Those companies that truly have a long term view, and are focused on taking care of the customer. There is enough space in this market for a lot of different approaches.

SG: What are the roots and genesis of the business, how did it get started? Is it accurate to call SafeMart a do-it-yourself model? Where do you fit in the scheme of things, and how did it get started?

CJ: Let me start with the background and then address the question about do-it-yourself if that’s ok. My background is kind of a maze of really neat experiences, which in retrospect kind of looks like a straight line leading to SafeMart. At seventeen years old I started my training to become an EMT, and challenged the state board exams a few days after my eighteenth birthday. EMS was a pretty cool gig for an eighteen year old, you grew up fast. While I continued working for a local EMS service I quickly went on to start my paramedic training and college coursework. At 22 I was made director of our local county EMS department, which was a hospital based department. I continued working EMS and at the same time I functioned as the Operations Director for that hospital. All of this to say that I have extensive background in emergency services, working with law enforcement, fire, EMS agencies, emergency dispatchers. I loved the excitement and the opportunity to help people, but it’s also really been a great life experience with some things I’ve done with SafeMart. Over the next several years I continued as a paramedic, but also had an opportunity, an interesting opportunity, to play some key roles with a telecom training company, working on some new e-learning initiatives that they had. I worked both on the publishing side and on the sales side of the business. So again, some unique experiences that helped and all came together. I had no idea where Providence was taking me on this wild path, but we woke up one morning to the “.com bust,” and at that point I guess my entrepreneurial side kicked in. I saw an opportunity maybe to do my own thing so to speak, and a short while later I took a phone call from a past colleague at the telecom company who knew that I wasn’t going to be interested in waiting for the dust to settle after this technology bust. It was 2001, and there were some people who saw an opportunity to fill a void in the residential alarm market. What started with them, with kind of a manufacturing focus and they even had a prototype of a self-contained wireless alarm system, that quickly proved to be an uphill battle with some pretty well established alarm controls and sensor manufacturers in that space. Even with a niche focus, for somebody to enter this space as a manufacturer, unless they’ve already got a customer kind of established and in the wings, it’s pretty hard to establish any upside for the company or any measurable benefit for the homeowner. So after a complete assessment of the landscape, nothing too technical of course, mostly a gut feeling and just observations, I came up with the concept and founded SafeMart. Today, we’ve grown into a pretty substantial force, participating in what I consider a true paradigm shift in the residential security market. So that’s kind of the background of the company, long story long.

There’s the question of the DIY market that you asked about, originally that’s kind of the way that we started, was a real strong DIY or do-it-yourself focus. You think about the acronym DIY and it has different connotations for different people. We really started developing at that point something that we wanted to play in the middle. So on one end of the spectrum in the industry, you’ve got large trade dealers from ADT to a one-man-shop. On the other hand, you do have the true DIY players who expect the customer to figure out the ins and outs of the alarm and kind of become an alarm technician overnight, for a one time deal, which is not real exciting. Both ends have challenges, one has high costs and the other has frankly low value. We operate in what I consider middle ground, of what we call professionally configured systems. While we still rely on the customer to participate in the placement of the sensors and things like that, which by the way makes them ultimately more familiar with their system, and more comfortable to use it.

With our Plug & Protect™ process we give the customer the best of both worlds. Professional quality equipment, UL listed central station monitoring, professionally configured programming set up and activation, plus lower costs on our end, which are passed on to the customer. That’s kind of the long and short of where we see ourselves in this market.

SG: I know Chris you and I have talked about that a lot of players that have sort of come and gone in that space, how has that been flushing itself out and where do you see that going?

CJ: It’s one of those things where people look, and I’ve had conversations with a lot of dealers around the country, who are trying to figure out what direction they’re going to go, some big, some small, some really do a fantastic job, some not so much. We’ve seen a lot of competitors come and go, on the internet specifically. I used to keep track of them, I don’t even bother anymore. I think the number is in the hundreds, and even thousands if you count all of the ADT or money dealers that end up advertising, which is a different story. The ability to flip the contract makes the economics quiet interesting with the advertising. The idea of the internet, it’s a great place and easy place to get cheap leads, I can tell you that the advertising competition is fierce in this space. Again, much of it is driven by the dealer market, big and small. When they can flip a contract for a healthy multiple, even with a handsome bounty on that contract, the math in the end sometimes doesn’t end up working out, because the total costs aren’t always rolled in. We’re a lot of times good at certain things, but not always good at everything so really looking at true costs I think sometimes takes months or maybe a year. It ends up being kind of a flash in a pan for a lot of companies advertising online. I would say that it’s growing, but I haven’t seen any evidence that it’s growing faster than the overall market, which is on the uptrend. Now certainly there are inherent moves to that medium, whether it’s social networking or just people researching more online, and I think that there are a lot of traditional dealers who have a great presence online with their local website telling their story and why they’re a great company. I don’t think the presence in that medium should be confused with trying to compete in the pretty cutthroat space of advertising online.

SG: How is SafeMart structured in terms of number of employees, their roles, how you train them, their expertise, and then how and who does your monitoring and how is service handled?

CJ: My business partner Brad and I run the business together with a really fantastic management team. We have about fifty employees and then other contractors. We have what you would expect from a security company, a good portion of our head count is in sales and technicians, then as a technology company, we have our web and application developers, we’ve got our marketing team, and then a great bunch of critical support roles like accounting and inventory management. There’s a lot going on but we have on the sales side a very extensive training program that lasts about six weeks. For the technicians, we insist that our tech’s are top notch, from the most experienced on our team all the way down to say the newest recruit learning what a RJ31 X-Jack is, or what a end of line resistor is and we’ve got a whole spectrum of experience on our team. Our technicians have a long, more progressive, never ending training process. This team is driven to know every residential panel, inside and out. We get a lot of support from manufacturing training and industry training, but most of it we have developed internally within the past ten years. We’ve got a very strong focus on training both on sales and technical side. We partner with CMS, to handle our alarm monitoring, they’re a good partner where all of our accounts are with CMS. On the service side, we service all of our own customers remotely.

SG: Do you think that this model is something that traditional security dealers might look toward as things change? Particularly the way technology has been enabling some of these things, where do you see that heading for the more tradition type of dealer?

CJ: There will always be a place for the traditional brick and mortar roll in a truck dealer. There is absolutely no doubt in my mind. There are some significant challenges ahead, which are going to require them to adapt, mainly to customer expectations changing. There’s a lot of great companies who operate in this space. If they remain focused on long term success, driven by the best technology, and that doesn’t just mean a key pad. Software plays a big role in the solution now. The best technology and taking care of the customer, and actually making a profitable business which would seem obvious, but again, when you have a lot of it driven by dealers who can flip contracts, it really changes the dynamics of it. If they’ve got a solid business and they can focus on those elements I think it will serve them well. We’ve got a very large number of dealers in a very fragmented market. When they are just focused on selling a contract or treating their customer base as an annuity, I really think the days of easy money from flipping contracts without a long term focus is going to change. This shift is more of a financial shift as it is a shift in the delivery mechanism that we’re focused on. The local and regional companies that have a solid business, and take care of their customers are going to survive and actually flourish as there’s some cleansing in the market. But there’s going to be a lot of headwinds and I think that on the residential side that there’s going to be some things really being thrown into the mix including new competitors that a lot of the effects of that ultimately are unclear. On the commercial side, I think there will always be a growing need for full on site surveys and installation. Since the downturn of the housing market, there have been a lot of security companies who have by necessity redoubled their efforts to focus on commercial accounts and some of them actually like it. They see, “Hey I can actually make a profit on the installation, imagine that.” I’ve talked to a lot of dealers who have moved into commercial space, again out of necessity, who intend on staying there because the value proposition is much different. They can sell the quality of their company and their technicians, as opposed to just being focused on price. I think as the U.S. economy improves these commercial opportunities are only going to grow. There will always be a need for traditional dealers in this space, and look, the good work that they do on site in a lot of cases cannot be replaced. That’s my take on the residential and commercial side, and again the shift that’s happening I don’t think is as much with a delivery mechanism as much as it is a financial focus.

SG: Looking at the competitive landscape, more recently we’ve seen a lot of the telecom’s, and cable companies coming in and taking a real shot at home security and bundling those things with other products and services. How concerned are you about that and where do you see that going?

CJ: That’s a good question. It’s a question that a lot of people are asking right now. I think the thing that we keep focusing on is the total market penetration. Market penetration on the residential side has been pretty flat for about two decades, about 18, 19, 20 percent. With new competitors coming into the space does that number grow? Some think it will double over the next ten years. If this happens, on the surface it could look like that it will amount to a net gain for existing dealers, as more marketing and focus and awareness expands the total market for everyone. That would hold true if everything else stayed the same. That is absolutely clear that it would be a boom to everyone in this industry, if nothing else changed. But, there’s also chance they will take a scorched earth approach and acquire customers at any cost. As they compete and vie for a position amongst each other, I mean look they’ve got huge advertising budgets and millions of existing customers. In this scenario, the outlook would not be as bright for traditional dealers and frankly would not be as bright for the customers, but the ability of these service providers to bundle will make it hard for customers to know how much that security piece or how much that automation piece actually costs. I realize that it’s easier said than done, but that’s another reason that we cannot compete on price because a traditional dealer is not going to compete on price with a telecom provider; with the marketing budget, with the economy scale, and with the ability to bundle. I know the emphasis in this industry for a long time has been on price or at least hook them on price or get the contract at any cost. That is the financial element that I’m saying is going to change, and we’ve got to focus on quality and taking care of the customer and long term outlook. I think that there’s some challenges too that they’re going to face. It’s not going to be just as easy as walking in and taking market share.

SG: Looking at this year Chris, what is your outlook? Has your outlook changed since maybe late last year when you first looked towards 2012? What have you seen in the first quarter, and what are you looking for in the rest of the year?

CJ: 2012 just goes back to the question about the telecom players coming in, and I want to make one more point there. I think 2012 is going to be the beginning of a new era in residential security for a lot of reasons. New entrance into the market and a rapidly changing platform, hardware and software. It’s going to get really interesting. There is a key element which I consider kind of a wild card as far as what’s going to happen in the competitive landscape, and that is the inherent complexity of this business. The needs analysis, the system configuration, the programming, the monitoring procedures, the dispatch procedures, the licensing, the alarm permits, it’s a lot of complicated elements of this business that create a pretty high barrier to entry for any company. The big players are not just going to walk in and take all the market share. If it were that easy I think they would have done it by now, but make no mistake they’re coming and in some markets are already here. For 2012, in addition to the changing competitive landscape, the manufacturers are scrambling to develop new platforms. The alarm panel as we know it, I think is going away. As we know it, the brains, the platform, what we’re seeing now with the integrated touch screens that are being slapped on to the old style platform I think is just going to be a stop gap. While they are probably developing more flexible, modern platforms, and don’t get me wrong I like the new emphasis on the touch screen, the consistent user interface, more intuitive navigation, I think the manufacturers finally realized it was probably not a great idea to have alarm engineers designing a user interface. I’m really excited about what we’re seeing from Logics, Honeywell, and others, as they really focus on mobile and user interface and a truly integrated platform. There’s also a lot of developments on the software side with interactive services and customer’s expectations for mobile connectivity and all of these things are coming together at once. It’s going to be interesting. On the economic outlook, I think the past three or four years have been really challenging for a lot of companies. I think demand as a whole is increasing, from what I’m hearing and seeing, and we’ll be relatively strong this year. I think the market will be somewhat clouded by all the disruption that’s starting but again, those companies who focus on their core competencies will do fine with a stronger consumer. For us specifically, we look for an ever increasing number of subscribers who want interactive services as I mentioned, and I think that will hold true for all of our colleagues. As we try to get this value proposition in home security from a need to a want, so a really big shift there with some stickier services. The bottom line for us is we are expecting our strongest year ever.

SG: Fantastic, Chris we’re out of time but thank you so much and I wish you continued success and a good rest of the year.

CJ: Thank you very much Scott, it was a pleasure talking to you.

SG: I want to remind listeners, for comments or questions please e-mail me at scott.goldfine@securitysales.com and as always thank you for listening.