If you want to run a profitable agency—or even dream of selling it one day—you need to master the concept of Lifetime Value (LTV). Most agency owners focus too much on the front end, like acquiring clients or closing deals, without understanding how much each client is actually worth over time.
LTV isn’t just a nice-to-know number; it’s the foundation of a scalable, profitable business. When you know your LTV, you can make smarter decisions about how much to spend on acquisition, retention, and improving your services. Let’s break it down step by step.
What Is LTV and Why Does It Matter?
LTV is the total revenue a client generates during their entire relationship with your agency. It’s a crystal-clear picture of how valuable your clients are, not just on Day 1, but throughout their lifecycle.
Why does this matter? Because without understanding LTV, you’re flying blind. You don’t know how much you can afford to spend on acquiring a client or whether your margins are sustainable over the long term.
For example, if your average client is worth $50,000 over two years, you can justify spending more on acquisition than if they’re only worth $5,000. Similarly, understanding LTV helps you prioritize retention strategies, ensuring you maximize the value of every client relationship.
How to Calculate LTV
Calculating LTV isn’t complicated, but it does require accurate data. Here’s the formula:
- Start with Churn Rate
Your churn rate represents the percentage of clients who leave your agency each month. If you have a churn rate of 5%, that’s 0.05 as a decimal. - Calculate Client Lifespan
To determine how long the average client stays with you, divide 1 by your churn rate:
Client Lifespan=1Churn Rate\text{Client Lifespan} = \frac{1}{\text{Churn Rate}}Client Lifespan=Churn Rate1
Using our example:
Client Lifespan=10.05=20 months\text{Client Lifespan} = \frac{1}{0.05} = 20 \text{ months}Client Lifespan=0.051=20 months - Multiply by ARPU
ARPU (Average Revenue Per User) is the monthly revenue you earn from each client. Let’s say your ARPU is $2,000. Multiply this by the client lifespan:
LTV=Client Lifespan×ARPU\text{LTV} = \text{Client Lifespan} \times \text{ARPU}LTV=Client Lifespan×ARPU
LTV=20×2,000=40,000\text{LTV} = 20 \times 2,000 = 40,000LTV=20×2,000=40,000
In this case, your LTV is $40,000.
Understanding Gross and Net Margins
Knowing LTV is great, but it’s incomplete without understanding your gross and net margins.
- Gross Margin: This represents the percentage of revenue left after covering your Cost of Goods Sold (COGS). Ideally, your gross margin should be 65–70%.
- Net Margin: This is what’s left after covering all expenses, including salaries, overhead, and taxes. A healthy net margin for agencies is 30%.
Let’s apply this to the LTV example:
- Gross Margin: If your LTV is $40,000 and your COGS is 30%, you’re left with $28,000 in gross profit.
- Net Margin: If your operating expenses take another 40%, you’re left with $16,800 in net profit.
These numbers tell you how much you can afford to spend to acquire and retain a client while still making a profit.
Using LTV to Drive Smarter Decisions
- Set Your Acquisition Budget
Knowing your LTV allows you to confidently set a Customer Acquisition Cost (CAC) budget. A general rule of thumb is to keep CAC below 20–25% of your LTV.
Using our example, if your LTV is $40,000, you can afford to spend up to $8,000–$10,000 to acquire a client.
- Prioritize Retention
Retention is often cheaper than acquisition, and it directly impacts LTV. If you can reduce churn from 5% to 3%, the client lifespan jumps from 20 months to 33 months—a massive increase in LTV. - Focus on High-Value Clients
Not all clients are created equal. Use your LTV data to identify your most profitable clients and focus on attracting more of them.
How to Increase LTV
- Deliver ROI
The quickest way to boost LTV is by delivering results that make clients money. If clients see a positive ROI from your services, they’ll stay longer and spend more. - Upsell and Cross-Sell
Offer additional services that complement your core offerings. For example, if you manage a client’s social media, upsell them on paid ads or video content. - Improve Client Experience
A seamless, proactive client experience reduces churn and increases loyalty. Map out your client journey and identify areas where you can add value. - Invest in Retention Tools
Leverage tools like HighLevel to automate communication and nurture client relationships. Regular check-ins, performance reports, and personalized attention go a long way in keeping clients engaged.
Why LTV Matters When Selling Your Agency
If your goal is to sell your agency one day, LTV becomes even more critical. Buyers look for agencies with stable, predictable revenue and loyal clients. A high LTV signals that your clients are satisfied, engaged, and likely to stick around after the sale.
Additionally, understanding your LTV allows you to demonstrate profitability and scalability to potential buyers. Agencies with strong LTV metrics command higher valuations and attract more interest from serious buyers.