Why did they make only 2 seasons of LoM?

Presumably the writers felt that they had done all they could with the series and wanted to go out on a high before they jumped the shark.

Life on Mars had a definite end to Sam's story, there was no need to continue on after it was clear he was Dead - not mad or actually a time traveller

Fawlty Towers pulled a similar trick.

Ashes to Ashes did a clever thing of moving the action to the 1980's with a strong female partnering Gene to give a twist on the character. I think that did go on one series too long though.

John Simm didn't want to do a 3rd series because this meant being away from his family, which was in London, I believe, while this was filmed in Manchester.

The reason for Ashes to Ashes is the writers weren't done with Gene Hunt, yet, & wanted to finish his story.

4 years later, but seeing as how a recent interview with the creator of LoM actually addressed this very thing in between discussing potentially doing another show about Sam and Gene:

Apparently, the initial plan was for there to be at least another series of LoM (and possibly a few more beyond that) but around halfway through production of Series 2, John Simm requested that he leave at the end of the current series due to being exhausted from having to be in pretty much every scene of every episode up till that point and concern that he was spending too much time away from his family, as well as just generally wanting to be free to do other things. The higher-ups agreed that rather than force him to keep going with the show or else try and keep the show going without Sam, the show itself would instead wrap up after Series 2 (meaning that aspects of the last couple of scripts had to be rewritten) with a definitive end to Sam's story - or at least the central questions surrounding it. They'd always intended to show exactly who Gene was and what was going on (which is what was revealed in the finale of Ashes To Ashes) but they obviously didn't have enough time to do that with the number of episodes they had left, hence the idea for A2A as a follow-up.

Only 2 seasons, because they were getting increasingly crap the longer it went on.