In a first price auction model, advertisers need to spend more money than they spend in second price auction model in programmatic digital advertising. To help the advertisers and reduce the ad spend, demand side platforms introduced an algorithm called “Bid Shading”. Here, you will learn all about bid shading.
Bid Shading dynamically optimizes the bid price for each ad space auction to save the buyers money in the first price auction. In first price auction method, there is a possibility of over value the ad inventory. That makes loss for the buyer. So, demand side platforms like Amobee introduced the “Bid Shading” concept. That helps the buyers to minimize their loss in the first price auction world.
– SRIDARAN BASKARAN
The First Price Auction method has some disadvantages. Especially, sometimes it over cost the ad space. Let’s consider, that the winning buyer of the auction bids for $10 and the second runner bid for $5. In this situation, the winner should pay $10. But, this buyer can win this ad space even if he bid for $5.1. So, from the buyer’s point of view, this is a loss. To fix this over value issue and save the buyers money, the demand side platforms launch a concept “Bid Shading”.
What is the Bid Shading in Digital Advertising?
Bid shading is a tool or algorithm that dynamically optimizes the bid price for every ad space auction to reduce the ad buying cost as much as possible under the first price auction. So buyers can avoid overpaying for ad space in first price auction.
The history behind the Bid Shading concept?
Programmatic advertising experiments with the second price auction method for a long period of time. In this method, the winner needs to pay one cent more than the second highest bid price. For example, advertiser A bid for $5, B bid for $3, and C bid for $1. In this aution, advertiser A won. Normally, advertiser A should pay $5 because they bid for that amount. But, as per the second price auction rule, winners no need to pay what they bid. Instead, they need to pay one cent more than the second highest bidder bid price. Here, the second higher bid price was $3. So, advertiser A, only needs to pay $3.01 to the publisher. So the second price auction model is very handful for buyers.
Publishers are not happy with the waterfalling method and second price auction method. So, most of the publishers adopt the header bidding method where the bid request is avail to all the ad exchanges at once. This method also has some disadvantages but this method is very handful to the publishers and this method helps to increase the ad revenue. This pushes the major ad exchanges to accept first price auction method that helps to increase the ad revenue for the publishers.
In the same scenario above [advertiser A bid for $5, B bid for $3, and C bid for $1], the winner advertiser A need to pay $5 exactly to the publisher. This method is favorable to the publishers. But, buyers are not happy with this change. Because most of the time they overvalue the ad space. In this same scenario, advertiser A bids for $5, but the same advertiser A can win this ad space even if they bid $3.1 or $.3.2 or more. Here, the overvalue is around $1.9. To overcome this drawback, demand side platforms introduced the method called “Bid Shading”.
As simply we can tell, bid shading is a tool or algorithm that helps to reduce the ad buying cost [bid] under the first price aution. So buyers can avoid overpaying in first price auctions.
How Does Bid Shading Work?
Amobee, Google’s DV360, The Trade Desk, Rubicon Project and PubMatic having it’s own methodology of bid shading. As per the latest figures released, buyers save about 20% of their money by using bid shading.
In the demand side platform, you can set the First Price Auction Bid and Second Price Auction Bid only if you choose the Flat Bidding Method. Normally, demand side platform’s bid price is equal to the bid price kept in the platform. Second Price Auction does favor the buyer and even if the quote for the higher bid, they need to pay just above the runner’s bid price.
But, in the first price auction method they need to pay what they quote in the bid responses. Demand Side Platforms give an option “Bid Shading” to the buyers when they select flat bidding. If they select the bid shading option, Demand Side Platform normally do not bid the exact amount kept in the first price. The Bid shading algorithm will focus on minimizing the auction price and also give importance to winning the auction.
If the advertiser chooses “Flat Bidding” and “First Price Aution Bid” in demand side platform and kept the first price as $5, the bid shading algorithm looks the auctions and learns about the closing prices. Also, it tries to reduce the bid price without reducing the chance of winning. For example, it first bid at $4, if it can win the auction then if slowly reduces the bid price further to identify the competitor’s price. Then start to bid just above their price. If it can’t win the auction, then it increases the bid price slowly but it can’t bid above the bid price kept in the platform. So, this bid shading concept helps the buyer to save money.
If the bid shading alogorithm improving well then publishers will get into trouble on their ad revenue. As per the tech companies statement they saved alomst 20% of buyers money. That means 20% loss for publishers side. Compared with second price auction method, publishers get more benefits from the first price auction method.
Conclusion
Now, almost every demand side platform provides this bid shading feature to their advertisers. This bid shading algorithm helps the advertisers to buy an ad inventories at low cost in first price auction model.
