Market Opportunity

Home Security: Your Foot in the Door to the Smart Home

Security Market Primed for Change

For many years, the home security market was just that—secure. For over a decade, home security has maintained a 25 percent penetration rate in U.S. households—mostly made up of an upper-class clientele. Recently, Smart Home innovations and the emerging Internet of Things have stirred the pot, creating a recipe for a shake up. Not only in the area of mobile apps and Do-It-Yourself (DIY) solutions, but also speculation about Google’s purchase of Nest Labs, talk of Apple iHome, and the entrance of big cable and telecom players to the market. As the automated home environment evolves, home security is transitioning from being a complete, discrete system into being one app among many in a multifunctional ecosystem. With all this in play, it’s a critical time for established home security providers to strengthen and expand their position in home security as a foot in the door to the Smart Home of tomorrow.

Home security has held fairly steady at 20-25 percent market penetration over the years, and is expected to grow 2-3 percent annually through 2016. By contrast, the Smart Home market – which will include products for automated and remote control of energy, entertainment, health and lifestyle – is expected to grow by double-digits. A study by Parks & Associates forecasts that as soon as 2017, more than eleven million households will have some type of Smart Home controller, up from an estimated two million in 2013.

In its current state, the home security segment has an unmatched leader in ADT, which corners a fourth of the market. The other top players are Protection1, Monitronics and Vivant, which make up the next nine percent. The remaining two-thirds of the market include bigger companies like Comcast XfinityHome and Time Warner Cable IntelligentHome, along with a crowd of smaller regional players and DIY solutions. Until recently, there hadn’t been much disruption in this market and the established order ruled.

New Players and New Models Disrupt

What has complicated this picture recently is a flurry of new competitors entering the market from all sides. There has been an increase in DIY solutions, such as Lowe’s Iris, that are sold with varying levels of monitoring support or no monitoring at all. Telecom and cable companies have added security services to their portfolios with varying degrees of success. And lastly, mega corporations like Google, Microsoft and Apple are investing heavily in various aspects of home automation.

All of this activity signals that like its forebear the Internet, the looming ‘Internet of Things’ will be a disruptor that prompts transformation. We’ve seen it before. Think of, smartphones, and streaming video just to name a few. Another example is the U.S. auto insurance market and the disruption caused by two upstart companies making a bold change in strategy and valuation. In the mid-nineties, GEICO and Progressive shifted to direct sales via websites and toll-free numbers. This enabled lower pricing, convenient 24/7 shopping, and a bigger budget for advertising. State Farm Insurance, the commanding market leader, was slow to adapt in the areas of direct service and pricing. As a result, the landscape of the auto insurance industry has changed considerably since 1995 as shown on the next page. GEICO, which had been a distant sixth in the market then, is now second with nearly ten percent of the market. GEICO has largely maintained its model of direct sales, while State Farm was gradually forced to evolve to more direct, around-the-clock services and value pricing. ADT, today’s commanding market leader in home security, could be looking at the same sort of losses if they aren’t faster than State Farm to adjust to changes in technology and customer behavior. On the bright side, home security may be the best foundation from which to build a Smart Home business. Of today’s Smart Home offerings, security is the most established option and also seems to be the most appealing to untapped households. Nearly 60 percent of U.S. broadband households claim some level of interest in the safety, security and convenience benefits gained from security and Smart Home products—more than double the size of the market served today.


Automobile Insurance Market Share From 1995 to 2013

What Should Incumbents Do?

With the current jockeying for position—and the huge potential of the Smart Home market—it’s a critical time for established players to develop strategies for more aggressive growth while setting up an advantageous position in the future Smart Home. Given the size of the unserved market, home security providers should seek to expand beyond their existing customer base to increase market penetration, providing a first mover advantage within the larger Smart Home market. At the same time, they should begin to proactively manage the customer lifecycle to nurture adoption of additional components of the Smart Home ecosystem.

The first objective of this two-pronged strategy is to increase your basic market share by developing stronger value propositions and flexible pricing structures to address a broader market. The current security customer is an upper-middle class family who views security as a necessity. Research on new potential consumers would provide insight into need states and fee structures that will motivate adoption for this large unserved market. The market segments most primed for this category are middle-class families and Millennials who are just getting started as renters and owners.

Adjustments to the product offering itself may also help to appeal to a broader market. There are a wide variety of offerings on the market today ranging from traditional equipment installation with 24/7 monitoring to DIY sensors linked to mobile apps. Market testing should reveal a happy medium that will appeal to middle-class and Millennial targets without cannibalizing the upper-tier customer. Getting a broader base of customers into home security will pave the road to broader adoption of Smart Home products and services as they are launched.

The second part of the strategy is to proactively manage the customer lifecycle – supporting the evolution of home security customers into active Smart Home consumers. Similar to increasing penetration in the unserved market, there is a need to segment potential targets, understand need states, and develop compelling Smart Home value propositions for existing customers. As an example, older customers may have a significant interest in health-related smart home solutions while younger customers may have more interest in energy savings or entertainment.

As established providers pursue this strategy they should consider:

  1. Leveraging strengths – Security players’ core strength is their service. What are the most valued, compelling Smart Home services that will justify incremental monthly service fees?
  2. Addressing legacy models – Take steps to consider not only what customers want to buy, but also how they want to buy it. Having an open product ecosystem may enable growth and flexibility for the long term.
  3. Marketing strategically – Apply agile marketing principles to target new consumer segments with a propensity to enter the Smart Home market via home security. Be sure to continually test and adjust marketing strategies to stay ahead as this market evolves.

The recent activity and major investments by Google, Microsoft and Apple illustrate a consensus that the Smart Home is a highly promising market. Today’s home security providers—who quite literally have a foot in the door—will get ahead of the competition if they take action now to address this emerging market. By broadening their customer base and opening their product ecosystem, they have the opportunity to build the relationships and credibility that will translate to a considerable advantage in the evolving Smart Home.

Steps to Success in the Smart Home Market

  1. Develop strategy to broaden customer base beyond current demographics by exploring new value propositions and pricing options that appeal to the unserved security market (middle class, DIY and Millennial households).
  2. Establish positive customer relationships that protect your current base while positioning your products and services at the center of the new Smart Home.
  3. Proactively manage customer life cycles by segmenting target markets, understanding need states and delivering value propositions that will evolve them into new aspects of the Smart Home.

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