Customer value
Customer value, also known as customer lifetime value, is what a customer brings in in total over the whole relationship. For a trade business, that counts the first job, later jobs, maintenance and referrals.
- 2 min read
What is customer value?
Customer value is what a customer brings in over the whole relationship, not just from the first job. In English it is called customer lifetime value, often shortened to CLV or LTV. Ideally, calculate it on margin, meaning what you keep after materials and hours, and not on revenue.
For trade businesses, customer value usually consists of four parts: the first job, any follow-up jobs, recurring maintenance and the customers who come to you through this customer.
Why customer value matters
Anyone who only looks at the first job often underestimates the value of a new customer. That makes marketing quickly seem too expensive. An installer who fits a heat pump often gets the annual maintenance too. A roofer who replaces a roof gets called later about the gutter or the dormer. And a satisfied customer tells the neighbours.
Customer value therefore helps you work out honestly what a new customer may cost. That is the basis for your ad budget and for the maximum cost per lead.
How to calculate customer value
A simple approach is the margin on the first job, plus the expected margin on follow-up jobs and maintenance over a number of years, plus an estimate for referrals. Use your own figures from your records. If you do not have them, start cautiously and calculate too low rather than too high.
A worked example, with made-up numbers to show the principle. Say an installer keeps an average of €2,000 margin on a heat pump. Some customers take a maintenance contract, worth for example €100 margin a year over five years. And say one in five customers brings in a new customer. Then the customer value in this example is roughly €2,000 plus €500 plus a fifth of €2,000, about €2,900 in total. That is considerably more than the first job alone.
From customer value to advertising budget
If you know what a customer is worth, you can work backwards to what you may spend to win that customer. Decide what share of customer value you want to spend on marketing. Divide that by the number of enquiries you need for one customer. That gives you the maximum cost per enquiry.
Continuing the example: say you want to spend 20 per cent of that €2,900, about €580 per customer. If one in four enquiries becomes a customer, an enquiry may cost roughly €145 in this example. Those are not benchmarks, but a way of calculating with your own figures.
Common mistakes
Calculating with revenue instead of margin. That makes it look as if there is more room for marketing than there is.
Counting only the first job. Then you turn down marketing that pays off well in the longer run.
Overestimating referrals. Be careful with what you cannot measure.
Not tracking which customers come back. Without an overview in a CRM customer value stays a guess.
How to approach it
Look up the customers of recent years in your records and see what they brought in in total. Distinguish by type of job, because a complete renovation and a small repair have a very different value. Use those figures to work out your maximum cost per enquiry for each service, and steer your campaigns on that.
Frequently asked questions
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What is the difference between customer value and order value?
Order value is what a single job brings in. Customer value is what a customer brings in over the whole relationship, including follow-up jobs, maintenance and referrals. For trade businesses with maintenance or repeat customers, customer value is often considerably higher than the first order.
Should I calculate customer value on revenue or on margin?
On margin. Revenue says nothing about what you keep after materials, hours and other costs. Only with margin can you honestly work out how much you can spend on marketing.
How do I set my advertising budget using customer value?
Choose what share of customer value you want to spend on marketing and divide that by the average number of enquiries you need for one customer. That tells you the most an enquiry may cost. Work this out per service, because the value differs per type of job.
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