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In the never-ending buy/sell saga, first-price auction and bid shading are the latest plot twists, writes MCN’s Pedro Gonçalves
In the never-ending saga of ad tech, first-price auction and bid shading are the latest plot twists, writes MCN’s Pedro Gonçalves.
O ne of the strongest memories from my early days in advertising was the “eureka” moment when for the first time I was exposed to the biddable media concept. Words like “programmatic” and “RTB” (real-time bidding) were still to come into use, but I felt strongly that whatever the official name, it would have a gigantic impact on the way we think about and trade in media.
Flash-forward to date, with programmatic becoming more mainstream, and we witness now two huge changes – yet not so spoken of – within this ecosystem: first-price auction and bid shading.
For a long time, second-price auction was the main operating model. If advertiser A bids for a user at $10.00 and advertiser B bids for the very same user at $9.00, advertiser A wins it by paying only one cent more than advertiser B ($9.01). This favours the buyers and, in my opinion, makes a lot more sense as it regulates prices in a closer parity of the supply/demand laws of economics.
On a first-price auction, however, advertiser A would still win the desired user, but paying the full value of its original bid ($10). This clearly is much more in favour of sellers and intermediators, who in turn can pocket the difference.
Bid shading is essentially a mid-point-based model. It is the tech layer between buyers and sellers – demand-side platforms (DSPs) and supply-side platforms (SSPs) – working to find a spot between second-price and first-price auction final outputs, as a way to minimise impacts on the buy side.
It functions through algorithms that consolidate an aggregated view of the market to estimate how much bids can be lowered. If historically the winning bid value for a given publisher or audience is X and an advertiser bids for it at X + 50 per cent, bid shading tools would minimise this “overbid”, positioning the bid anywhere between X + 1 per cent and X + 49 per cent.
As with any new element introduced into the already complex buy/sell equation, bid shading and the shift to a first-price model come with a lot of concerns to be addressed:
WATCH-OUTS What can be considered an “aggregated view of the market”?
From using advertisers’ historical data and to some extent even exposing it, to how much each technology represents of the actual market, the potential for black boxes is evident.
Transparency and tech reliance
The bid shading concept almost screams out loud for validation, but as of now the whole chain has to rely entirely on DSPs, SSPs or on the “hard to crack handshakes” between both to determine the right price.
One way or another, it is not for free
While some DSPs and SSPs offer their bid shading features at informed prices, other players offer them for “free”. However, if your business model is to charge a percentage of the total traded value and now each operation costs more than it did previously, you are making more from less.
State of play and readiness
Buying platforms were built and perfected over
“BUYING PLATFORMS WERE PERFECTED TO OPERATE ON A SECOND
PRICE AUCTION BASIS, SO THEY ARE NOT FULLY READY TO OPERATE AT THE SAME LEVELS IN A SIGNIFICANTLY DIFFERENT MODEL.”
years to operate on a second-price auction basis, so it is not a long shot to state that those are not fully ready to operate at the same levels of efficiency in a significantly different model. SSPs might take the edge for a while, but that situation opens doors for conflicts of interests as they make revenues only when buyers win through their exchanges.
Ground moving below our feet without enough warning
The transition to a first-price model is not something yet to start. It is already happening and growing at a fast pace. Irrespective of how long it will take to become the new standard, this change is not being communicated at the scale it deserves, considering the size of potential impact for brands on their buying efficiencies. Bid shading might look entirely beneficial rather than being a remedial action without the proper context and awareness.
ADAPTING TO THIS NEW REALITY On publisher-based buys
Despite publishers’ initial resistance to programmatic, at some point it became bluntly clear that staying out of it, sooner or later, would mean staying out for good. To ensure a higher degree of control and price protection than open exchanges, different trading methods were created. The programmatic deals include private marketplaces (PMPs), preferred and guaranteed, each with a different value and price proposition.
To play smartly with those different types of deals is now not only a benefit but a need. With the main benefit of PMPs at stake (lower entry prices, as they are still biddable), revisiting the negotiation of preferred and guaranteed deals from a different perspective is important. It makes those into powerful efficiency-gain resources, an approach that we have successfully implemented for our clients.
On open-exchange-based buys
Not depending only on tech to establish the right price is a worthy measure to be taken, due to the current development and business-model gaps. Trading teams’ tactical knowledge, plus regular granular analysis of win ratios vs win prices, can unveil interesting buying opportunity ranges.
Progressively test features like dual capping (cost per click (CPC) or cost per acquisition (CPA) cap + cost per thousand impressions (CPM) cap), whenever available, can enhance performance in direct response campaigns, since machine learning and auto-optimisation towards lower CPCs and CPAs already imply wide CPM variances.
Specific to bid shading adoption, DSPs are positioned by design to have better chances of producing more effective algorithms as we progress, due to their connection with several SSPs at a time.
OVERALL
Since the intermediators between buyers and sellers have grown their shares significantly, it is quite justifiable to push the tech side to at least include interfaces that can provide more clarity on what to expect when using new features like bid shading in their platforms. Matt McIntyre from Essence recently gave a quite interesting suggestion: an “opportunity curve” module, so buyers can have a better view of the trade-off between win rates and prices.
In the mid and long run, buy-side players could also benefit from exerting pressure to reduce the maximum bids, reflecting also in reduction of the effectively paid values. For this to work, however, it needs to be treated as a macro and shared industry agenda, with wide-scale adoption and continuous practice.
Movements like the shift to first-price auction and bid shading feel almost like I am working less and less in media and increasingly more on something like the anti-virus industry: developing solutions for every threat, until the next – bigger and more complex – comes, in a never ending cycle.