Measuring the Lifetime Value of Customers Acquired from Google Search Advertising

Our main objective in this paper is to measure the value of customers acquired from Google search advertising accounting for two factors that have been overlooked in the conventional method widely adopted in the industry: the spillover effect of search advertising on customer acquisition and sales in offline channels and the lifetime value of acquired customers. By merging web traffic and sales data from a small-sized U.S. firm, we create an individual customer level panel which tracks all repeated purchases, both online and offline, and whether or not these purchases were referred from Google search advertising. To estimate the customer lifetime value, we apply the methodology in the CRM literature by developing an integrated model of customer lifetime, transaction rate, and gross profit margin, allowing for individual heterogeneity and a full correlation of the three processes. Results show that customers acquired through Google search advertising in our data have a higher transaction rate than customers acquired from other channels. After accounting for future purchases and spillover to offline channels, the calculated value of new customers is much higher than that when we use the conventional method. The approach used in our study provides a practical framework for firms to evaluate the long term profit impact of their search advertising investment in a multichannel setting.