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Customers that businesses acquire through Google search advertising are more valuable than thought, new research shows.
Researchers at Washington University in St. Louis have developed a new method of measuring the effectiveness of Google search advertising, taking into account not only online sales, but goods or services purchased offline as well.
The study discovered the conventional method of measuring the return on investment of online search ads is limited, and fails to take into account the potential for cross-channel sales spillover.
By measuring only online shopping, current measurement methods also fail to consider the long-term profit impact of new customers, according to the research.
The study's results show that customers acquired through Google search advertising have a higher transaction rate than customers acquired from other channels.
Ying Xie, a researcher and associate professor of marketing, said the new calculations account for a customer's lifetime value.
“In their lifetime, they could be an active customer, repeatedly making purchases, and the cumulative amount of these purchases, that’s sort of the profit stream we should take into account," Xie said.
Based on the model’s estimates, researchers found that the conventional method for valuing customers is nearly $50 lower than their new model.
After accounting for sales spillovers across channels and the long-term effect, the estimated value of customer acquisition is as high as $950 per customer, according to the study.
The data has large implications not only for businesses trying to accurately gauge their investment in online search advertising, but for Google as well, according to Tat Chan, a researcher and associate marketing professor .
"They want to really show their customers, their business clients, how effective search advertising is," Chan said.
The research, "Measuring the Lifetime Value of Customers Acquired from Google Search Advertising," was recently named Washington University's 2012 Olin Award winner for its performance-enhancing applications to critical management issues.
Chad Brooks is a Chicago-based freelance business and technology writer who has worked in public relations and spent 10 years as a newspaper reporter. You can reach him at firstname.lastname@example.org or follow him on Twitter @cbrooks76.