Lifetime Value (LTV)

Customer lifetime value (LTV) is the total gross margin a B2B service firm expects to earn from a single client over the entire span of that relationship. For a retained PR agency it is the sum of monthly fees, less delivery cost, from contract start until the client churns. For a project-based law practice it is the margin on the first matter plus any follow-on work and referrals that client generates. LTV converts rolling revenue into one clear number so you can decide how much you can rationally spend on winning similar clients.

Because revenue in services tends to vary by project scope and duration, LTV is rarely a neat subscription multiple. Instead it requires tracking three drivers:

1. Average billing per period (monthly retainer or typical project fee).
2. Gross margin (fee minus direct delivery cost—staff hours, subcontractors, licences).
3. Average client lifespan (number of months or projects before churn).
   

Multiply the first two to get margin per period; multiply that by lifespan to get LTV.

Sets a rational ceiling on acquisition spend

Once you know that a mid-market legal client yields £180 k in gross margin across three years, spending £25 k to win that account feels acceptable; spending £60 k does not. Without LTV you either overspend on splashy tactics or underspend and starve growth.

Shapes client-selection strategy

Analysing LTV by segment often shows that a few industries or company sizes account for most profit. An IT services firm may find that fintech clients stay five years while retail clients stay two. The firm can then refocus marketing and sales on the longer-lived, higher-margin cohort.

Informs productised-service design

Knowing LTV highlights whether a low-ticket diagnostic or sprint is worthwhile. If 40 % of diagnostics upgrade to a six-figure retainer, the diagnostic is a profitable entry ladder; if only five per cent convert, scrap it.

Guides valuation and lending conversations

Potential acquirers and banks value service businesses partly on predictable future profits. Demonstrating growing LTV to CAC ratios—ideally 3:1 or higher—adds credibility to financial models and eases access to growth capital.

1. Measure period revenue and margin

Retainer example – A PR agency bills £12 000 a month. Direct delivery cost (consultant time, media database, subcontracted design) totals £7 200, leaving £4 800 gross margin per month.

Project example – A law firm charges £60 000 for an M&A due-diligence matter; senior associate hours and third-party searches cost £30 000, so margin is £30 000.

2. Establish average client lifespan

Use cohort churn analysis. If 100 clients joined three years ago and 55 remain today, the average life might be 30 months. For project-only work, count follow-on matters: an M&A client returning for two contract reviews yields three projects over two years.

3. Compute LTV

Retainer agency – £4 800 margin × 30 months ≈ £144 000 LTV.

Law firm – £30 000 margin × 3 projects = £90 000 LTV.

If referrals are common, you can expand LTV with a referral factor. When each bookkeeping client reliably introduces 0.3 new clients, multiply LTV by 1.3 for the true network value.

Customer acquisition cost (CAC) and the golden ratio

CAC is all marketing and sales spend (ads, salaries, software, events) divided by the number of new clients won in that period. A healthy B2B services firm aims for LTV:CAC of at least 3:1; 5:1 is excellent and signals that you could spend more to grow faster.

\nExample\n

Annual marketing and sales spend: £450 000

New clients: 30

CAC = £450 000 ÷ 30 = £15 000

If LTV = £90 000, the ratio is 6:1—room to scale spend. If new tracking shows LTV is actually £40 000, ratio falls to 2.7 : 1—time to lift retention, prices, or cross-sell.

Where CAC overshoots, start by dissecting channel performance. Outbound SDR might deliver clients at £10 000 each, LinkedIn ads at £25 000 each; reallocating budget alone can raise the ratio.

How to lift lifetime value

Raise average billing without hurting win rates

• Package core and premium tiers—add quarterly strategy workshops or priority service-desk support to justify a higher retainer.
• Review price annually against delivered ROI; most staffing-constrained agencies under-charge long-standing clients.

Lengthen client lifespan

• Onboard with a 90-day success plan so early value is obvious.
• Schedule quarterly business reviews linking work to client KPIs.
• Introduce a dedicated customer-success manager to pre-empt churn triggers.

Expand revenue per client

• Offer adjacent services—an IT MSP adds cloud-security audits; a content agency adds paid-media management.
• Tie fees to performance metrics (percentage of ad spend managed, percentage of savings realised).

Harness referrals and upsells

• Create a simple referral ask after visible wins; a bookkeeping firm might email “Know another SaaS CFO battling deferred revenue headaches?”
• Trigger upsell campaigns when usage or results cross a threshold—HubSpot workflows can alert account managers when open-rate benchmarks are smashed.

Pitfalls unique to service businesses

• Blended margins hide true LTV – Account managers often record time across clients in bulk. Without client-level time tracking LTV can look higher than reality.
• Key-person dependency – Losing a single senior consultant can collapse margin on several accounts, slashing LTV overnight. Cross-train teams and document processes.
• Scope creep – Fixed-fee retainers erode margin if scope isn’t policed, shrinking LTV even while revenue remains steady.
• Economic cycles – Service spend is easier to cut than SaaS subscriptions. Build diversification or flexible contracts to protect lifespan during downturns.

Conclusion

Lifetime value is the compass that shows whether growth is profitable or merely busy. Service firms must look beyond headline revenue to margin and lifespan, then compare that number with CAC to decide where to invest next. Measure carefully, segment by client type, and improve through higher-value packaging, longer retention, and expansion revenue. Get LTV right and every pound spent on acquisition returns three, five, or even ten in predictable, compounding profit.