Customer lifetime value

The formula

A simple version, built from your own job history:

• CLV = yearly gross profit from the customer × years they stay + large one-time jobs

Use gross profit (the price minus the job's direct costs), not revenue. Revenue includes the materials and labor you already paid for; only gross profit is left to cover overhead, marketing and your own profit.

Example: An HVAC customer on a maintenance plan stays 8 years. Each year brings $100 of gross profit from the plan after the cost of the visits, plus repairs averaging $150 a year (one $300 repair every other year): $250 a year, or $2,000 over 8 years. Add a replacement in year 8 that earns $3,000 in gross profit, and lifetime value is $5,000. A customer who calls once for a $300 repair and never again is worth $300. The numbers are made up for illustration.

Why maintenance plans raise it

A service agreement pushes on every part of the formula:

• More gross profit each year. Scheduled visits happen whether or not anything breaks, and each one is a chance to find a repair the customer wants done now.
• More years. A customer with a plan has a reason to call you instead of searching for someone new, and a renewal date that brings the question back every year.
• The big job. Regular visits put you in front of the equipment as it ages, so the replacement conversation happens with you, ahead of a breakdown, instead of with whoever answers an emergency call first.

The same logic works outside HVAC: water heater and drain maintenance for plumbers, maintenance-wash memberships for detailers and yearly house washes for pressure washing companies. A plan only raises lifetime value if each visit is priced to earn gross profit. A plan sold at a loss to get in the door has to wait for repairs and replacements to pay it back.

Using it with acquisition cost

Lifetime value is what makes customer acquisition cost readable. A channel that costs more to win a customer than the first job earns can still be worth it, if those customers really come back. You pay to win the customer now and collect the profit over years, so even a profitable channel can strain cash flow.

Example: A pressure washing company pays $150 to win a customer whose first house wash earns $120 in gross profit, so it starts $30 behind. If customers from that channel book an average of 3 more yearly washes at $120 each, lifetime value is $480, and the $150 is paid back with the second wash. The numbers are made up for illustration.

Estimate it from your own records

Projections are easy to inflate, so start with what has already happened:

1. Pick the customers whose first job with you was two or three years ago.
2. Add up the gross profit from every job they've had since, including the first.
3. Divide by the number of customers in that group.

The result is what an average customer has actually been worth so far: a floor for lifetime value, not a guess. You need gross profit per job for this, which is what job costing gives you.

Common mistakes

• Using revenue instead of gross profit. It overstates every customer by the full cost of the materials and labor.
• Assuming every customer stays. The average has to include the ones who hired you once and never came back.
• Counting the replacement as certain. Some plan customers move, and some shop the big job around.
• Forgetting what it costs to keep a customer. Plan visits take labor, members get discounts and callbacks eat profit. Subtract them.
• Spending to a number you haven't seen. Set marketing budgets from the lifetime value your records show, not the value you hope a plan will deliver.