Lifetime Value of a Customer Acquired Through Paid Search May Be Lower than You Think

Search engine marketing gets a large share of marketing spends because it often results in an immediate transaction and is easily measurable. But is a new customer driven from SEM as valuable as customers driven through other channels? I believe not. When advertisers begin to segment their customers by originating channel, they will find that search engine marketing, like coupons, promotions, and incentives, results in less loyal customers relative to other channels.

Search is a tool to find stuff, and when that stuff happens to be products, search is often used as a tool to find the best deal. Deal seekers are the same no matter the channel, and they tend to be less loyal customers.
Marketers are dependent on customer engagement to increase lifetime value (LTV). In fact, many marketers are willing to lose money on the initial sale knowing they will earn profit on subsequent purchases. But the path to reengaging customers driven from paid search is far from clear. There is no guarantee that these new customers will be responsive to your email, direct mail, or even desperate telemarketing campaigns to upsell and cross-sell. In fact, the best way to reengage these customers may likely be through additional paid search campaigns. This has to be a factor in determining your budget allocation.

Which brings me to my final point; customers driven through email list rental are likely to respond to future engagement through email. Since email has become the dominant form of customer engagement, customers acquired through email are very likely to result in a more loyal (valuable) customer that other channels in the media mix.

My advice is to analyze your 2006 advertising spend by channel of origin. What is the value of the customers who came in through search (organic and paid)? Through email list rental? Viral marketing? Banner ads? Map it all out. You may well find that what you can afford to spend to acquire a new customer via email is higher than search engine marketing. How will you approach 2007 differently?

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