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Historically, programmatic advertising has operated on a second-price auction model. In recent years, however, giants like Google Ad Manager have moved to a first-price auction model, citing transparency and simplicity as reasons for the switch.
So, what’s the difference between first-price and second-price models, and what does it mean for programmatic marketers?
Let’s say you want to get your best friend something really special for their birthday. You find the perfect gift on an auction website—a signed, out-of-print record from their favorite band.
You see that a couple of other people have already bid on the record—Bill bid $50, and Jane bid $75. Your maximum budget is $100, so you bid that amount. Depending on whether the website uses a first-price or second-price auction model, here’s how your bid will play out:
First-price auction model: You’ll pay the exact amount that you bid—$100.
Second-price auction model: You’ll pay $0.01 more than the second-highest bid, or $75.01.
That second-price bid sounds a heck of a lot better, right? The question is, in a world where first-price auctions are the standard, how can buyers save money while still submitting winning bids?
Let’s back up a few steps and say that you’ve developed an algorithm to assess the optimal bid. You tell the algorithm your maximum budget is $100. It then analyzes historical bid data for vintage records and estimates the lowest possible bid within your budget that’s sure to win the auction. With the help of your algorithm, you end up bidding $85—a price that’s lower than your maximum budget, but higher than the highest current bid. You win the bid, get the record, and your best friend is elated.
In media buying, the vintage record is an impression, and the algorithm you use to assess the optimal price is a bid shading algorithm that lives within the DSP you’re using to buy media. DSPs that offer bid shading automate the bid optimization process and aim to reduce the bid price that a buyer pays to win an auction.
So, why utilize bid shading? For brands and agencies, the benefits come down to time savings and cost efficiency.
Bid shading reduces the time that media buyers spend manually analyzing bid pricing to find the perfect bid and updating that bid throughout a campaign. This frees them up to do more of the high-skill, strategic and, frankly, enjoyable work that it takes to run effective campaigns.
In addition to the time efficiency bid shading affords media buyers, it also creates opportunities to win more impressions at lower prices, resulting in more efficient CPMs and more impressions at the same budget. As a result of lower CPM’s, bid shading can improve CPC, CPA, and CPV. According to AdExchanger, buyers save about 20% on average with bid shading.
Like programmatic advertising itself, bid shading is an example of automation at work. By automatically optimizing bids, it saves brands money and frees up media planners’ valuable working hours.
Bid shading is just part of Basis’ optimization suite, which saves time and increases efficiencies through AI and workflow automation. Learn more about how Basis is transforming the media buying experience.