What are the Three Things You Need to Know About Programmatic Auction Dynamics?

Published on August 25, 2021

The Beeswax Team

What are the Three Things You Need to Know About Programmatic Auction Dynamics?

Programmatic auction dynamics can be a tricky business. Play the game wrong, and you may underbid and miss out on the impressions your campaign needs for success. Or, you could win those impressions, but overpay dramatically for them. So what do you need to know to get it right? In this post, we’ll look at the three most important things you need to know. 

What are programmatic auction dynamics?

Each and every ad auction is governed by different rules and buying volume, and these can affect how buying and selling ultimately play out. Remember that bidding isn’t the only factor in play - there are innumerable variables that can affect an auction. Whether winning bids are based on first prices or second prices, the number of advertisers, the competitiveness of the inventory, whether some brands employ pricing floors or not, the availability of the data, the level of transparency - all of these factors impact how an individual auction functions. 

And all of these factors influence the bidding strategies you should consider in any auction.

Let’s first take a look at second- and first-price auctions to understand how they work.

Second price auctions

In this auction, the second-highest bid ultimately determines the price of the impression, which admittedly sounds odd. But it makes sense if you look at an example: If agency A bids $5 and agency B bids $3.50, agency A will win the auction, but only pay $3.50. In theory, advertisers are protected from overpaying for media in this model. That’s why many in the industry consider it best practice; the market sets the price, more or less. Since buyers are bidding the maximum they’re willing to pay, it’s more value-based. And since buyers are typically able to win the auction at a price lower than their stated max, they’re generally happy with the results. 

First price auctions

In a first price auction the advertiser pays the full bid price, even if all the competitor bids were significantly lower. So if you bid $5 for an ad impression and everyone else bids $1, you still pay the full five bucks.

As a result of the industry’s adoption of header bidding (which we’ll get to!), first price auctions are becoming more common. Many believe this model increases transparency, since advertisers know exactly what they’ll be paying. Many buying platforms have built solutions that enable buyers to optimize their first-price auction bids, often called Bid Shading (learn more about how Beeswax helps with this here).

The system was designed for waterfall auctions

Programmatic really began as a fire sale for remnant medium although it’s come a long, long way since then!  Real-time bidding (RTB) and the technologies that evolved around it to form the digital advertising ecosystem were designed to help publishers quickly and efficiently sell off any media that wasn’t sold directly to advertisers. (Remember insertion orders?) As a result, the first auction systems were waterfall, meaning that inventory would be passed from ad network to ad network in order of preference until every impression was sold. There were no algorithms back in the early days, so this waterfall tag or daisy-chaining auction style was the best method we had at the time.

How header bidding changed the game

In the waterfall model, there were multiple bids for every impression. Each of these bids would “wait in line” as auctions were transacted. Obviously, the daisy chain thing wasn’t incredibly efficient, particularly as programmatic took off and became the industry standard. We needed a better way to buy and sell media. 

Today, the system has evolved. We have algorithms and premium inventory. And we have header bidding. Header bidding opens up the ad marketplace to more bidders, and - at least in theory - no single bidder has a clear advantage. Header bidding involves plugging in code on a publisher’s header, so that each outside source of ad demand is placed on equal footing. In other words, all the bids are submitted at the same time and at the same level of priority, instead of working their way down the waterfall. The bids take place before there is a call to the ad server. 

The upside of header bidding is that advertisers are on a level playing field when it comes to winning a slot. There’s also better visibility into available inventory and the costs associated with buying that inventory, so any advertiser can win a premium spot with the right bid. 

The net-net

There’s a lot to learn about auction dynamics, and to be fair, this barely scratches the surface. It’s a tricky and challenging business, and we recommend you read up on all of it -  but the key takeaways are that header bidding is pretty standard now, while bidding itself can be variable. It’s important to know, first and foremost, whether you’re looking at a first-price auction (more likely) or a second price auction. And it’s equally important to understand what the media is worth to you or your client and bid accordingly. A misstep here can result in overpaying for media, or missing out the placements you need because you underbid. 

It’s overwhelming, and there’s a lot of conflicting opinions out there about what really is best practice, but the Beeswax team is here to help! Contact us for support on your campaigns - and check out our Resources if you want to dig deeper into the basics of programmatic!

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