Every Local Business Owner Should Know Their Customer Lifetime Value (LTV)

Running a small or local business means making every pound count, especially when it comes to marketing and acquiring new customers. One of the most critical metrics to guide these decisions is Customer Lifetime Value (LTV). Yet, many business owners overlook this important number, missing out on valuable insights that could drive growth and profitability.

In this article, we break down what LTV is, how to calculate it, and most importantly, why knowing your LTV empowers you to make smarter, more confident decisions about your marketing spend.

We also examine real-world examples of calculating LTV for home services, hospitality, and professional services businesses, so you can see exactly how this applies to your business.

What Is Customer Lifetime Value (LTV)?

Customer Lifetime Value (LTV) is the total amount of revenue a business can expect to earn from a single customer over the entire duration of their relationship. In simple terms, it’s a prediction of how valuable a customer is to your business, not just from their first purchase, but across all the purchases they might make in the future.

Think of LTV as a long-term view of customer value. For some businesses, a customer might buy once and never return. For others, customers may return regularly, generating revenue for months or even years.

Why Is LTV So Important for Small and Local Businesses?

Knowing your LTV gives you a clear benchmark for how much you can afford to spend on acquiring a new customer. If you know that, on average, a customer will bring in £1,000 over their lifetime, you can confidently invest more in marketing than if you were only looking at the profit from their first purchase.

LTV helps answer key questions like:

• How much should I spend on Google Ads or local SEO to get a new customer?

• Is my marketing profitable in the long run?

• Which types of customers are most valuable to my business?

• Should I focus on repeat business, or is a one-off acquisition enough?

Without knowing your LTV, you’re essentially flying blind when it comes to marketing investment.

How to Calculate Customer Lifetime Value

The basic formula for LTV is this:

LTV = Average Purchase Value × Purchase Frequency × Customer Lifespan

Let’s break down each part:

• Average Purchase Value: How much does a typical customer spend per transaction?

• Purchase Frequency: How often a typical customer buys from you in a given period (e.g., per year)?

• Customer Lifespan: How long (in years) does a typical customer continue buying from you?

Example Formula (using revenue):

If a customer spends £100 per visit, visits 3 times a year, and stays with you for 5 years:

• LTV = £100 × 3 × 5 = £1,500

Example Formula (using profit):

If you want to factor in profit rather than revenue, simply multiply the final number by your average profit margin as follows…

• If your profit margin is 30%, LTV (profit) = £1,500 × 0.3 = £450

Real-World LTV Examples by Industry

Let’s look at how LTV applies to different types of local businesses.

CALCULATING LTV FOR Home Services BUSINESSES (Plumbers, Electricians, LANDSCAPERS)

Scenario:
A local plumbing company charges an average of £150 per job. Many customers call them for emergencies, but some become regulars for annual boiler servicing and minor repairs.

• Average Purchase Value: £150

• Purchase Frequency: 1.5 times per year (some customers are one-offs, others are repeat)

• Customer Lifespan: 4 years (on average, before they move or switch provider)

LTV Calculation: £150 × 1.5 × 4 = £900

What this means:
The average customer is worth £900 over the course of their relationship with the business. The owner can now confidently spend up to £900 (less costs and profit margin) to acquire a new customer, knowing they’ll recoup that amount over time. In reality, they’ll want to spend less, but this sets an upper limit.

Takeaway:
If you know your LTV is £900, spending £100 on Google Ads to acquire a new customer is a wise investment, especially if you have systems in place to encourage repeat business.

CALCULATING LTV FOR Hospitality BUSINESSES (Restaurants, Bars)

Scenario:
A neighbourhood restaurant has an average spend per table of £40. Regulars visit monthly, while some customers only come once.

• Average Purchase Value: £40

• Purchase Frequency: 8 times per year (mix of regulars and one-offs)

• Customer Lifespan: 3 years

LTV Calculation: £40 × 8 × 3 = £960

What this means:
A loyal customer is worth up to £960 over a three-year period. This helps the restaurant determine how much to invest in loyalty schemes, local advertising, or special offers to attract and retain customers.

Takeaway:
Understanding LTV allows hospitality businesses to justify spending on customer acquisition and retention strategies, knowing the long-term payoff.

CALCULATING LTV FOR Professional Services BUSINESSES (Law Firms, Accountants)

Scenario:
A small accountancy firm charges £600 for annual tax returns. Many clients also purchase additional services (e.g., business advice), bringing their average yearly spend to £1,000. Clients typically stay with the firm for 6 years.

• Average Purchase Value: £1,000

• Purchase Frequency: 1 (annual service)

• Customer Lifespan: 6 years

LTV Calculation: £1,000 × 1 × 6 = £6,000

What this means:
Each client is potentially worth £6,000 over the course of their relationship with the firm. This allows the accountant to invest more in marketing, including their website, local SEO, Google Ads, networking events, and so on, to acquire high-value clients.

Takeaway:
For professional services, a high LTV justifies more substantial marketing investment and even referral incentives.

Why LTV Matters for Your Marketing Decisions

Knowing your LTV transforms how you approach marketing. Here’s why:

• LTV Sets Your Customer Acquisition Budget:
  You can confidently spend up to your LTV (minus costs and desired profit) to win a new customer, rather than being limited by the value of a single sale.

• LTV Prioritises Retention:
  If your LTV is high, it’s worth investing in customer retention strategies (e.g., loyalty programs, follow-up emails) to maximise the value of each customer.

• LTV Informs Pricing and Offers:
  You can afford to offer discounts or introductory offers if you know you’ll recoup the cost over the customer’s lifetime.

• LTV Identifies Your Best Customers:
  By segmenting your customers and calculating LTV for each group, you can focus your efforts on the most profitable ones.

How to Use LTV in Your Business

1. Calculate Your LTV: Use your sales data to estimate average purchase value, frequency, and lifespan.

2. Set Your Acquisition Budget: Decide what percentage of LTV you’re comfortable spending to win a new customer.

3. Optimise Your Marketing: Invest in the channels and tactics that bring in the highest-LTV customers.

4. Monitor and Adjust: Update your LTV calculations regularly as your business grows and customer behaviour changes.

5. Understand LTV by Customer Type: Different types of customers, such as consumers versus commercial clients, may be more profitable than others, meaning you can invest more to acquire the valuable ones.

Conclusion

Customer Lifetime Value isn’t just a marketing buzzword; it’s a practical tool that empowers local and small business owners to make smarter, more profitable decisions. By understanding and applying LTV, you can confidently invest in acquiring new customers, retain your best clients, and sustainably grow your business. If you’re looking at the best way to attract new local customers to your business, arrange an intro call with one of our experts today.