Once you have your cliff picture, the pen tool will indeed cut the shapes out of the original image so that they appear as letters. After that, how well the final image appears depends on how much embellishment and detail you choose to add to it. Suggestions:
Shade the letters:
Select > All over your cut-out letters, switch to the move tool (shortcut
v) and move them slightly, add a new layer, and while the selection is still there, use the brush tool with black and a faint transparency to shade in parts of the letters.
Add peripheral decoration: The example you posted looks so great because the artist has taken a great deal of time to add additional elements around the letters. To do so, you can select portions of the image (perhaps with the polygon lasso tool) like noticeable trees and rocks, copy them, and paste them arranged around the edges.
Include overlaid effects: Even if your letters don't look perfect, a great way of hiding inconsistencies is to include another layer of some other image, and then changing its blending effect. In your example, clouds are transparent over the letters, but other blending effects can be used.
Unfortunately there is no clear-cut way (no pun intended) to make these letters easily. The more time you put into polishing the image and adding extra images, the better it will look. Hope some of that helps!