Programmatic auctions are undergoing a pricing revolution. Historically, supply-side platforms (SSPs) used second-price auctions, which is where the second-highest price determines how much an advertiser pays for an impression. But over the past year, most SSPs have shifted to first-price auctions, which is where the highest bid determines what the buyer pays. This has given rise to bid shading, which splits the difference between first-price and second-price winning bids. Adam Soroca, head of the global buyer team at Rubicon Project, spoke to eMarketer’s Ross Benes about how advertisers use bid shading to mitigate the difference in prices between different types of programmatic auctions.
What does bid shading do?
It reduces the price in order to not charge the advertiser the full first-price. So rather than bidding in the second-price world, where advertisers may bid high and expect to clear at a lower rate based on the second-price, demand-side platforms (DSPs) have adjusted their algorithms to know that the price they bid is the price that they’ll pay.
How does it work?
In general, the shading is a percentage discount. There are different flavors of it. Some platforms look at the impression level while others group similar types of inventory.
What is the benefit of this?
It provides buyers with savings from paying the full first-price. It allows them to deliver their campaigns in full, so they’re sacrificing very little in terms of win rate.
Doesn’t this hurt publishers since it reduces the price that their impressions get billed for?
We’re able to discuss with publishers why this is good for their business. It provides a much more consistent stream of demand. It doesn’t have the lumpiness of spikes in price. We mark very clearly where it’s a first-price or a [bid shaded] auction.
Has bid shading become more common over the past year?
Absolutely. The major platforms are somewhere along the spectrum of either developing it or on the second iterations of it.
Why is it so difficult for programmatic advertisers to just agree to pay what they bid?
The industry grew up on the second-price concept and their bidding strategies were based on that. In the move to first-price, those buyers had to be retrained and learn the new game theory of how to bid into a first-price world.