Programmatic Media Buying 101: Bid Shading And Bid Caching Defined

Programmatic auctions are experiencing a big shift in the way inventory is priced. Media buyers who have been using second price auction strategies are finding that more and more SSPs are moving to first price auctions.  In the second quarter of 2018 a report by Getintent found that 43.3% of impressions were sold through first-price auctions, where the highest bid wins an impression. That figure was much higher than the previous study done in December 2017, when just 5.8% of the impressions analyzed were sold in a first price auction. With more money shifting to first price auctions, the programmatic advertising industry, both on the buy and sell side, had to come up with strategies and tactics to mitigate the effect this change has had on the way they buy and sell inventory.

Bid Shading

Bid shading is one of the tactics, which is relatively new to DSPs, that has been developed as a compromise between first- and second-price auctions.  Buyers are unhappy about paying higher prices than they were used to in second price auctions. Bid shading reduces the price for the advertiser so rather than pay the full first price, they get charged and average price between the first and second price auction.  The price is usually calculated by the SSP or DSP from bid history information which includes typical bid win rates for certain websites.

For right now bid shading is mostly used by the supply-side platforms (SSPs) and is free to the user.  But as first price auctions become the norm for programmatic media buying, more Demand Side Platforms (DSPs) are adopting this tactic out of necessity.

Another, less accepted method of dealing with the shift in auction dynamics has been developed by Ad Exchanges and is called bid caching.

Bid Caching

Why has bid caching all of a sudden become an important ad-tech term to be familiar with over the past month?  This is due to the fact that media buyers using the Global ad marketplace Index Exchange did not know that this tactic was being used for over a year until they published this blog post.

“We didn’t think it was an issue with buyers. We were so surprised. We thought this was an industry practice,” said Drew Bradstock, SVP of product at Index Exchange.

So What is Bid Caching and Why Do Media Buyers Not Like It?

It’s when a lost bid on a programmatic auction is used to fill a subsequent auction, where the impression characteristics do not necessarily match up.  For example, if the buyer bids on a particular publisher’s homepage to appear in the morning and loses that bid, the exchange would roll the bid into another auction for the next piece of content that the consumer views. So instead of running on a homepage, the ad would most likely end up on an article page. For the media buyer, this means that they are not  getting what they originally paid for.

So what are the other negative aspects of bid caching for DSP buying?

  1. Overpaying for inventory: advertisers are willing to pay higher prices for the first page in a user session, so if that’s not what they are getting then they have overpaid for the ad
  2. Messing up frequency caps and pacing: delays between a bid and ad server could increase the likelihood that a DSP found the user elsewhere
  3. Brand safety concerns: ad is served on the same domain but not on the same page

What’s Next for Programmatic Media Buyers?

Ad tech professionals have expressed their frustrations with yet another example of the lack of transparency in the industry.  Just when we think we are finally making strides to improve the negativity surrounding programmatic advertising, a story like this pops up and stirs up controversy all over again.  The negative press that has resulted from Index Exchange’s lack in public disclosure of their tactics has hopefully served as a warning to others in this space to own up to any changes in their platforms that would have a drastic effect on the way inventory is bought and/ or sold.  In the meantime, it’s important for media buyers to know all the tactics and associated terms with the move to first price auctions and how their DSP partners are adapting to the changes being made.  Talk to us if you have any doubts or questions about what your next steps should be.

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