First price auctions
On the surface, at least, the move to first price auctions should simplify and unify the mechanics of auction behaviour. In the past, if a single exchange was responsible for auctioning off an ad impression, a second price auction would award the highest bidder the right to serve the ad, at a penny more than the bid of the second highest bidder (the clearing price).
However, in a world where publishers permit multiple exchanges to bid on their inventory (via header bidding, server-to-server solutions, and other programmatic line items), the clearing price from one exchange could end up losing out to the clearing price of another exchange, regardless of which buyer within those exchanges was actually the overall highest bidder. Moving everything to first price auctions means that the buyer’s bid in an exchange should more fairly compete against buyers within other exchanges.
When exchanges started introducing first price auctions, buyers had to adapt their bidding behaviour in order to bid with prices they were actually willing to pay, rather than expect some margin of reduction in a second price auction. Bid shading is a service that some DSPs, SSPs, and exchanges offer to help buyers optimize their bids and drive costs down while maintaining win rates. Essentially, bid shading takes a maximum possible bid and tries to forecast the market value for a given impression, in order to determine the actual bid price to submit in a first-price auction. Google may be removing their own advantageous position of hosting a second price auction with their last look at the inventory, but their ad server will still contain all of the data they’d need to effectively understand market pricing for any given impression.
Ultimately, buyers have always been incentivized to target the market they want to reach for the lowest cost possible. Publishers, on the other hand, want to receive maximum value for the supply they are offering for sale. There’s a certain tension or balance that is required in the negotiation of these transactions, in order for both parties to protect their interests and walk away happy with the deal struck. If bid shading and other techniques are still being used by buyers to optimize their spend, what tools should publishers leverage to maintain a fair price for their inventory?
Flooring in first price auctions
Flooring still takes on an important role in this new landscape, but will need to be implemented and measured differently within first price auctions. Pricing rules can’t be measured for immediate positive impact in an A/B test as they had been previously, since they will no longer influence the clearing price of that particular auction. Instead, floors should be used to help publishers set fair prices for segments of their inventory and protect against buy-side optimizations that might drive the publisher’s revenue down over time.
In order to set effective floors, publishers first need to understand what it is that makes their inventory valuable.
First-party data is going to be even more important with third-party cookies increasingly under scrutiny and falling within privacy restrictions at the browser level, such as those already implemented within Safari and now a major focus for Chrome’s upcoming changes. If publishers can’t determine the value of their audiences, they can be sure the walled gardens of ad giants like Google, Facebook, and Amazon will.
With browser updates impacting future reliance on cookies, contextual targeting likely becomes more prominent. As a publisher, what is it about the content you create that engages users and provides value to brands that are looking to advertise alongside it?
Understand bid behaviour
Publishers can leverage bid-level data from their exchange partners to understand the historical market price for additional segments of inventory, such as geo, ad unit, viewability, device type, and date/time.
As with any flooring strategy, if the floors are set too high and buyers find better value elsewhere, publishers may lose out on campaign spend entirely. If the floors are set too low, buyers may be able to keep lowering their CPMs and the publisher’s revenue will decline over time. If a publisher applies floors too broadly across their inventory, one or both of those scenarios may be occurring within more granular targeting on a buyer’s campaigns.
At Sortable, we’re big fans of changes that help clean up and shape up an overly-complicated industry. But we also understand that publishers can often get stuck dealing with the impact of sweeping industry-wide changes, especially when they threaten their bottom line. That’s why we continue to monitor the impact of massive changes like these, and why we want to help provide publishers the tools they need to maximize revenue from ads.
Contact us at firstname.lastname@example.org or request a demo today to learn how Sortable's dynamic flooring algorithm helps safeguard publishers against bid shading and maximize your earnings for every impression.