The short definition
Lifetime value (LTV) is the gross profit a customer generates over the entire time they buy from you.
A workable version for a service business:
Average job value × gross margin × number of jobs over the relationship.
A customer averaging $400 a job at 45% margin who returns four times over five years is worth about $720 in gross profit — not $180.
Why it changes decisions
Because acquisition budgets are almost always set against the first job.
A business that believes a customer is worth $180 will not pay $150 to acquire one. A business that knows the true figure is $720 will pay it happily — and will outspend and outgrow the first business in the same market.
This is frequently the whole explanation for why a competitor seems able to afford advertising that looks uneconomic to you.
What to include
Repeat jobs. The obvious component.
Maintenance plans. Recurring revenue at usually better margins.
Additional services. The plumbing customer who later needs a water heater.
Referrals. Genuinely part of a customer's value, and usually left out. A customer who sends two neighbours is worth substantially more than one who does not — a rough allowance is better than nothing.
Use gross profit, not revenue. Revenue-based figures flatter and mislead.
Calculating it without perfect data
Most small businesses cannot produce a precise figure. A reasonable estimate is far better than none:
- Take fifty past customers from three or more years ago
- Count how many bought again, and how many times
- Average the total value across all fifty, including the ones who never returned
- Multiply by your gross margin
That produces a defensible number in an afternoon.
What raises it
Maintenance plans. The single largest lever for most service trades, and widely under-sold.
Staying in contact. Customers do not return because they forgot who you were. An email list is the cheapest fix available.
Post-job follow-up. Review request, plan offer, seasonal reminder.
Serving them well. Retention beats acquisition on cost every time.
The trades where it matters most
Anything with a service interval — HVAC, pest control, pool, chimney, dental. If a customer should be seeing you annually and is not, the gap between actual and potential lifetime value is the largest number in your business.
Working yours out
Do the fifty-customer calculation. It takes an afternoon and it usually changes what you are willing to spend.
Frequently asked questions
How do I calculate lifetime value?
Average job value multiplied by gross margin multiplied by how many times a customer buys over the relationship. Use gross profit rather than revenue — revenue figures flatter and mislead.
What if I do not have good data?
Take fifty customers from three or more years ago, count repeat purchases, average the total across all fifty including those who never returned, and multiply by your margin. An afternoon's work.
Should referrals count?
Yes, and they are usually left out. A customer who sends two neighbours is worth substantially more than one who does not. A rough allowance beats ignoring it entirely.
What raises lifetime value most?
Maintenance plans, by a wide margin in most service trades and widely under-sold. Then staying in contact — customers do not return because they forgot who you were.