Programmatic advertising encompasses two types of auctions: first-price and second price. In first-price auctions, the highest bidder determines the sale price of an impression. In second-price options, the second-highest bidder determines the impression’s sales price.
For example, if two buyers participating in a second-price auction bid $30 and $50, respectively, the one who bid $50 will win the auction but only pay $30.01. The ad tech partner calculates the amount paid by the winning bidder. Often, this amount is between the first- and second-price.
What is Bid Shading?
Bid shading shifts the sales price from the second-price auction to a first-price auction. In doing so, the technique ensures that an impression’s cost surges, benefiting buyers, publishers, and intermediaries.
Technically, bid shading is a demand-side predictive algorithm that finds the optimal bidding price in a first-price auction. The method eliminates the need for the highest bidder to pay $0.01 on top of the second-highest price. Instead, a media buyer who bids the highest price pays that bidding price.
How does bid shading work?
Assume that we are holding an auction where two buyers, A and B, bid $100 and $50, respectively. If the auction is second-price, A has to pay $50.01, whereas, in a first-price auction, they have to pay $100.
If our impression’s actual value is $80, the second-price auction will underpay, whereas the first-price auction will overpay. Bid shading creates a compromise between the two auctions by providing a way for buyers to predict their bids.
Since the algorithm runs on demand-side platforms, buyers can access the past bid rates, websites, ad sizes, exchanges, and other significant statistics that they can use to analyze and set bids that are within a reasonable price range. Often, individuals confuse bid shading and shadowing and use them to mean the same thing.
What is bid shadowing?
Bid shadowing is the process of estimating the price of a bid. Bid shading is placing an estimated bid that you think is below the impression’s worth. Bid shadowing comes before bid shading because it determines the bidding price.
Benefits of Bid Shading
Bid shading increases DSPs’ performance, saves buyers’ bidding money, and maximizes the advertiser’s value. Publishers also get a good payout as the mid-range price is higher than the bid in a second-price auction.
When to bid shade
Bid shading is ideal for branding campaigns. Marketing companies can use the technique to create dynamic CPMs and simulate second-price auctions’ price fluctuations. But if an agency bids the same amount everywhere and the DSP fails to vary its offer, the market might overpay for an impression.
Does SSPs offer bid shading?
Before engaging with an SSP, it is wise to inquire whether they provide bid shading services. Bid shading benefits buyers more than publishers, who mostly see the advantages in the long term. And this factor affects how SSPs provide bid shading services.
For example, most SSPs offered the service to stabilize their revenue and publishers. Others delivered it as an optional. Either way, providing bid shading services from the supply side is wrong as SSPs should focus on the publishers’ best interests.
Offering the service violates this requirement in two ways:
- Bid shading is self-serving. For example, SSPs can reduce publisher prices to attract more buyers
- Providing bid shading services means that SSPs use contractually provided information privilege against the affected publishers. How else would they obtain the bid shadowing information?
Eventually, all SSPs will stabilize their publisher’s demand, mainly as advertising shifts to bid shading programmatic auctions. Otherwise, they too will experience the deflationary effect of bid shading that publishers are currently experiencing.
For example, some market analysts predict that SSPs will have to undercut each other on media prices to sustain their bid shading competitiveness.
As a publisher, you need to understand how SSP bid shading affects you. Have a conversation with your SSP to know which data they mine, the average CPM reduction you experience, and how the bid shading process benefits you, if any.
Where are we headed?
The advertising industry is shifting to bid shading programmatic auctions for branding or prospecting campaigns. This shift is especially possible with the rise of big data technology, which is essential in analyzing past bids and predicting new ones. Some DSPs and SSPs are also offering more than bid shading services.
For example, the Goodway Group and Google Ads’ bid shading algorithm enables it to predict bids based on an impression’s expected conversion rate and the client’s CPA goals. The same does not apply to publishers, who rely on SSPs to provide bid shading services. Publishers have the least say and the most to lose as advertising shifts to bid shading programs auctions.
What will be the impact on publishers’ revenue?
There is no doubt that publishers are likely to get less revenue under the bid shading system. To prove this point, we have to go back to the benefits of bid shading to buyers. Mainly, the buyers save on purchase costs by bidding on a value that is neither too far above nor too low below the actual impression’s value.
For publishers, these savings decrease the cost per thousand impressions. But this is not always the case.
Bid shading increases the total publisher revenue in the long run by aligning demand and supply. For example, Yieldbird, a price management agency for online publishers, notes that the revenue per 1000 requests and viewability for online publications increased in the long term but depended on price.
Publishers need to consider the following three factors to reduce the negative impact of bid shading on their revenue.
- Price management policy goes a long way in increasing your viewability and revenue.
- Price matters, especially if your viewability is high.
- Your inventory value benefits from viewability.
Publishers and SSPs need to embrace bid shading to weather the shift in pricing, marketing, and monetization of CPMs.