Why publishers need to understand auction dynamics

Display advertising is growing 18% annually in the UK, but what’s less well known is the increasingly important role that auction types are playing in the prices being paid, writes Emma Newman

Online ads have been traditionally sold by the “waterfall” method; that is the ad impression was touted to potential buyers sequentially, one at a time. If the first potential buyer passed, it was offered to the second and so on. The order of who was approached was based on different, sometimes arbitrary factors, such as the historic prices paid or simply the ‘personal’ relationship between the intermediaries working on behalf of the seller (such as a supply-side platform, SSP) or the buyer (such as a demand-side platform, DSP).

The obvious trouble with the waterfall method was once the sequence arrived at someone who was willing to buy the impression, all subsequent potential buyers were closed out of the process – meaning potentially higher-paying customers further down the waterfall were ignored.

The rise of auctions

However, the rise of technologies such as header bidding changed this by enabling a single ad impression to be offered to multiple buyers all at the same time. Essentially, changing from a sequential process to a simultaneous one, thus, ideally finding the buyer with the highest willingness to pay.

Think of it like a property auction. All the potential buyers in the room bid against each other which reveals the one willing to pay the highest price. The auctioneer doesn’t approach people in the room privately, one at a time, until he finds someone willing to buy the property at a price the seller would accept.
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This new method of offering ad impressions to all potential buyers simultaneously is the essence of header bidding. This has been good news for publishers, enabling them to achieve higher overall CPMs for their inventory. What lies at the heart of header bidding is auction dynamics, or the auction-related forces that affect the price paid when impressions are sold. Understanding these dynamics is crucial for publishers to stay ahead of the ever-evolving programmatic landscape.

Different bidding strategies

There are various different auction types and pricing models and to fully understand one of the largest and most important discussions taking place in our industry today, you need to have some form of grasp on them.

There are two main auction types: ‘First Price Auction’ is where the auction closes at the highest bid price and ‘Second Price Auction’ is where the auction closes at less than the highest bid price (often a penny more than the second highest bid).

Second price auctions have traditionally been used in digital advertising since programmatic selling began and work in much the same way as they do on many consumer auction sites like eBay. They’ve been seen as a way of selling the inventory at the price point the market values the impression/inventory at.

For instance, if buyer A valued the impression at £3 and buyer B values it at £2, then buyer A wins the impression, paying £2.01. As buyers are paying the second price, it allows each buyer to submit bids that reveal their intent and desire to win the impression. The ultimate price they pay is the ‘market price’ – usually a little lower than their bid price, based on the second highest bid submitted in the auction.

The process involved in an auction is far too complicated to cover in any adequate detail in this column (suffice to say we produced a free guide to take you through it).

However, it’s important that your relevant teams be aware of the likes of dynamic floors, modified second price auctions, etc.

Further, the adoption of header bidding and inconsistency across technology providers has changed how auctions operate, and we are now seeing the industry start to shift towards first-price auctions for header bidding inventory.

The future?

As programmatic grows, it’s absolutely crucial that publishers have control over their revenue stream, so here are some trends that publishers should be aware of around optimising their performance within programmatic auctions.

There is a temptation for publishers to continue adding programmatic auction partners in order to increase yield but be careful about the impact this will have on additional costs and also user engagement. For example, more tech behind the scenes can result in longer page loading times for visitors.

The cost of infrastructure to process the higher volumes of impressions that run through header bidding are becoming a focal point for the industry. To optimise auction dynamics, publishers should work with tech providers that offer efficient computing and throttling capabilities to remain competitive.

Furthermore, the increasing competition among these tech providers and the advances in technology should mean that publishers will see greater yields and also falling costs and, ultimately, achieve greater control within the process.

Finally, the noise around the commissions or ‘leakage’ that intermediaries take should fade as greater focus is placed on the metrics that matter, namely the yield publishers receive and ROI in general.

Emma Newman is country manager, UK at PubMatic