The average cost-per-click on a Google search ad returns a value of $10 per click for each keyword, finds a Washington University (St. Louis) research team. Maybe more.
As the university describes, the researchers found that the value of Google search advertising is grossly underestimated, because conventional methods of measuring return on investment (ROI) of online search ads fails to account for “cross-channel sales spillover.”
Dr. Tat Chan of the university’s Olin Business School and his colleagues developed an empirical method that to estimates the lifetime value of customers acquired from search advertising, and from multiple data sources. This method provides advertisers with a long-term and more complete measure of the value of customers acquired via Google search.
Google’s total advertising revenues in 2010 were $28 billion, up from $439 million in 2002.
As the researchers described, an advantage of search advertising is that it creates a better fit between a potential customer’s needs and the advertised message. It reaches a large audience with immediate interest in the product, so, both stimulates sales among existing customers and helps acquire new customers.
But conventional methods of measurement were insufficient. They “Just [look] at online transactions, that are one-time transactions,” says Ying Xie, PhD, associate professor of marketing. “But in our method we propose that we should think about the customer’s lifetime value…they could be an active customer, repeatedly making purchases. The cumulative amount of these purchases — that’s the profit stream we should take into account.”
The researchers merged web traffic and sales data from a small U.S. company to create an individual customer-level panel that tracks repeat purchases, both online and off-line, and identifies if those purchases were referred from Google search advertising.
The results demonstrated that customers acquired through Google search advertising showed a higher transaction rate than customers acquired from other channels. Taking into account future purchases and spillover to off-line channels (e.g., the customer bypasses the web for a second purchase), the calculated value of new customers is far higher than the value obtained using conventional methods.
The team developed an integrated model of customer lifetime, transaction rate and gross margin. Based on their model’s estimates, they find that the firm would incur a loss of $48 on average to acquire a new customer if using the conventional method. But after accounting for sales spillovers across channels and the long-term effect, they estimate the value of customer acquisition as high as $950 per customer.
The challenge of this new multichannel online/offline methodology is that it is not yet standardized; Nielsen, comScore and other companies are still perfecting the methods of quantifying exposures across media: quantifying the ultimate ROI is the likely next evolution.
The team presented its findings in its paper, “Measuring the Lifetime Value of Customers Acquired from Google Search Advertising,” which took the University’s 2012 Olin Award for relevant and performance-enhancing applications to critical management issues. The Olin Award for faculty research was initiated in 2007 by Richard Mahoney, executive-in-residenceat Olin and former chairman and CEO of Monsanto Co.