Lifetime Value of Customers

CELEBRATING 30 YEARS

http://dx.doi.org/10.1287/mksc.1110.0658

© 2011 INFORMS

Vol. 30, No. 5, September–October 2011, pp. 837–850

issn 0732-2399 eissn 1526-548X 11 3005 0837

Measuring the Lifetime Value of Customers

Acquired from Google Search Advertising

Tat Y. Chan, Chunhua Wu, Ying Xie

Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130

{chan@wustl.edu, chunhuawu@wustl.edu, xie@wustl.edu}

O

ur 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: (1) the spillover effect of search advertising on customer acquisition and sales in off-line channels

and (2) 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 that tracks all repeated purchases, both online and off-line,

and tracks whether or not these purchases were referred from Google search advertising.

To estimate the customer lifetime value, we apply the methodology in the customer relationship management

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 off-line channels, the calculated

value of new customers using our approach is much higher than the value obtained using 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.

Key words : customer lifetime value; multiple-channel shopping; customer...