Everything you need to know about first-price auctions

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A few months ago, Google announced that they would be transitioning Google Ad Exchange to a unified first price auction in Google Ad Manager. In early June, Google will begin testing a small percentage of inventory, with the transition schedule currently on track to have all inventory running through first price auctions by the end of July. More recently, Google formally announced new Unified Pricing Rules for Ad Manager, which deprecate the existing Open Auction Pricing Rules for first price auctions.

Are these changes poised to disrupt and change the game for publishers attempting to maximize their revenue from ads? How will buyers react to the new auction dynamics? How will publisher strategies for setting floors for their inventory be impacted?

First-price auctions

On the surface, at least, the move to first-price auctions should simplify and unify the mechanics of auction behaviour. Previously, a single exchange was responsible for auctioning off an ad impression. A second-price auction would award the highest bidder the right to serve the ad. At a penny more than the bid of the second-highest bidder (the clearing price).

However, in a world where publishers permit multiple exchanges to bid on their inventory, the clearing price from one exchange could end up losing out to the clearing price of another exchange. Examples of multiple exchanges include header bidding, server-to-server solutions, and other programmatic line items. This is regardless of which buyer within those exchanges was actually the overall highest bidder. Moving everything to first-price auctions means that the buyer’s bid in an exchange should more fairly compete against buyers within other exchanges.

While Google may just now be transitioning to first-price auctions, the concept itself is not new. In fact, many of the other major exchanges began moving to first-price auctions in late 2017. Until now, Google’s Ad Exchange has retained second-price auctions. All while holding a position in the ad server to have a “last look” opportunity to out-bid other eligible line items.

Pricing rules

Setting price floors on inventory was one of the main tools publishers could use to combat Google’s last look advantage and the general reduction of bids in second-price auctions. In a second-price auction, a publisher’s floor could act as the second-highest bidder in that auction, forcing the highest bidder to pay more, resulting in increased CPMs and measurable lift. In a first-price auction, setting a floor can’t manipulate the clearing price, as the bid submitted by the buyer either wins or loses without reduction.

It’s within this context that Google is now releasing their unified pricing rules, which are applicable to all open auction inventory including price priority line items and exchange bidding. Publishers can set pricing rules for segments of their inventory across all applicable demand sources, but will no longer be able to set floors that apply to only Ad Exchange (at least not without convoluted line item pricing and header bidding configurations, which would play havoc with reporting and prioritization in the ad server).

Google has stated that their changes to first-price auctions and unified pricing rules are intended to “simplify our publisher platform and create a fair and transparent auction for everyone”. At least, in theory, these updates seem to be beneficial to both publishers and buyers. Publishers receive the full bid from the buyer without a complex flooring strategy, and buyers get more transparency into what’s happening within the auction.

But is it really that simple?

Bid shading

When exchanges started introducing first-price auctions, buyers had to adapt their bidding behaviour in order to bid with prices they were actually willing to pay, rather than expect some margin of reduction in a second price auction. Bid shading is a service that some DSPs, SSPs, and exchanges offer to help buyers optimize their bids and drive costs down while maintaining win rates. Essentially, bid shading takes a maximum possible bid and tries to forecast the market value for a given impression, in order to determine the actual bid price to submit in a first-price auction. Google may be removing their own advantageous position of hosting a second price auction with their last look at the inventory. However, their ad server will still contain all of the data they would need to effectively understand market pricing for any given impression.

Ultimately, buyers have always been incentivized to target the market they want to reach for the lowest cost possible. Publishers, on the other hand, want to receive maximum value for the supply they are offering for sale. There’s a certain tension or balance that is required in the negotiation of these transactions. This is in order for both parties to protect their interests and walk away happy with the deal struck.

If bid shading and other techniques are still being used by buyers to optimize their spend, what tools should publishers leverage to maintain a fair price for their inventory?

Flooring in first-price auctions

Flooring still takes on an important role in this new landscape but will need to be implemented and measured differently within first-price auctions. Pricing rules can’t be measured for immediate positive impact in an A/B test as they had been previously since they will no longer influence the clearing price of that particular auction. Instead, floors should be used to help publishers set fair prices for segments of their inventory and protect against buy-side optimizations that might drive the publisher’s revenue down over time.

In order to set effective floors, publishers first need to understand what makes their inventory valuable.

Understand users

First-party data is going to be even more important with third-party cookies increasingly under scrutiny and falling within privacy restrictions at the browser level, such as those already implemented within Safari and now a major focus for Chrome’s upcoming changes. If publishers can’t determine the value of their audiences, they can be sure the walled gardens of ad giants like Google, Facebook, and Amazon will.

Understand content

With browser updates impacting future reliance on cookies, contextual targeting likely becomes more prominent. As a publisher, what is it about the content you create that engages users and provides value to brands that are looking to advertise alongside it?

Understand bid behaviour

Publishers can leverage bid-level data from their exchange partners to understand the historical market price for additional segments of inventory, such as geo, ad unit, viewability, device type, and date/time.

As with any flooring strategy, if the floors are set too high and buyers find better value elsewhere, publishers may lose out on campaign spend entirely. If the floors are set too low, buyers may be able to keep lowering their CPMs and the publisher’s revenue will decline over time. If a publisher applies floors too broadly across their inventory, one or both of those scenarios may be occurring within more granular targeting on a buyer’s campaigns.

Publishers can often get stuck dealing with the impact of sweeping industry-wide changes, especially when they threaten their bottom line. That’s why it’s important that you and your ad ops solution continue to monitor the impact of massive changes like these.

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