What Are Ad Exchanges and Why Are They Important?

Reading time: 6 minutes

Ad exchanges have always been one of the more complicated components of publishers’ ad tech stacks. Though, over the past few years things have changed. Ad exchanges have become almost completely absorbed by supply-side platforms (SSPs) as well as some other new and fun ad tech tools, which has cast a shadow over them and making them even more complicated to understand.

However, understanding what ad exchanges are and the role they play in the programmatic ecosystem is essential to your livelihood — and scalable revenue generation — as a publisher. 

In this article, we’re going to dive into the world of ad exchanges to cover everything you need to know about them. Keep reading to learn more.

What Exactly Is Open Ad Exchange and Why Do They Matter?

The simplest definition of an ad exchange is that it’s a virtual marketplace where publishers and advertisers can come together to trade digital advertising space. The advertising space refers to the space a publisher has on their website to display an advertiser’s ads, also commonly known as the “ad inventory.”

Ad inventory can include the proper space for native, display, video, movile, and in-app ad formats. The trading — or, selling and buying — of these inventories happens in real-time auctions whereby ad exchanges are simply driven by the supply and demand of participating parties.

Ultimately, ad exchanges enable advertisers and other media buyers to more easily access ad inventories across a wide range of websites simultaneously, as opposed to negotiating directly with specific publishers, one by one. 

It’s much more effective and efficient to use an ad exchange, and yes, it’s very similar to how ad networks work. However, the difference is that ad networks work by aggregating inventory from various publishers to mark up and sell for a profit. Ad exchanges offer up more transparency as they allow media buyers to see exactly what price ad impressions are being sold for — plus, they’re based on a one-time-fee business model rather than marketing up their inventories.

How Do They Work?

Essentially, publishers look to sell advertising space on their websites to the highest bidders while advertisers continue to buy the virtual ad spaces where they’ll achieve the best visibility for their products or services. 

This is precisely where an ad exchange comes into play.

The ad exchange in question serves as the virtual platform powered by real-time bidding (RTB) technology to allow for programmatic ad buying. They act as a giant pool of ad inventories where both parties can participate in hopes of getting a good deal. 

The RTB part allows the ad exchange to function in real-time based on previous user behavior during which a specific ad is served to them. The information gathered typically has to do with the time of day, device type, ad position, ad format, and more. This allows the process to happen within milliseconds, providing more efficient deals that result in the engagement outcomes both parties are looking for.

In other words, the ad exchange automates the entire ad deal process acting as sort of a middle-man between publishers and advertisers. Therefore, ad exchanges work by connecting advertisers — who work with demand-side platforms  — and publishers — who work with supply-side platforms.

Wait, What Do DSPs and SSPs Have to Do With This?

Remember when we mentioned that ad exchanges have become overshadowed by DSPs and SSPs? Let’s take a moment to clear that up.

A DSP is a platform that allows advertisers broad access and management control over the digital inventory via multiple ad exchanges. It offers media buyers the option to serve and track their ads, participate in RTB, and utilize various methods of audience targeting to further optimize their goals. 

An SSP is a platform that allows publishers to place online ads in front of a targeted audience while also allowing them to manage, automate, and optimize their ad inventories using a single interface.

In a nutshell, these platforms allow for both parties to fine-tune the entire process while creating more transparency to prevent bad ads and fraudulent ad activity. Moreover, DSPs and SSPs work with the ad exchanges on behalf of the ad tech players to maximize revenue  — kind of like a middle man for the middle man.

What Are the Benefits of Open Ad Exchange?

Open ad exchanges provide several benefits for both publishers and advertisers, including the following:

  • More ad control: Publishers get the option of choosing the ad formats and ad style that will appear in their spaces according to their niche and industry. They have to choose where and when the ads are displayed which allows them to align ads with the brand and avoid any unwanted impressions.
  • More cost control: Publishers get the option to set up minimum CPMs for their ad inventories, which allows them to control their bottom line by keeping their ad revenue and income above a particular threshold.
  • Ad filtering and blocking: Publishers also get to take the steps in avoiding spammy, inappropriate or sensitive ad content, otherwise known as “bad ads.” This allows them to maintain control over the quality of the ads being served on their websites to minimize the chances of producing a poor user experience as well as instances of ad fraud.
  • Advertiser and ad network blocking: Publishers can avoid certain brands altogether by either blocking specific advertisers or specific ad networks to avoid bad partners. 
  • Better targeting and optimization options: Ad exchanges offer advertisers more options regarding marketing by allowing them to choose the best ad placements that meet their realistic needs and goals. This makes it much easier to maximize the return on ad spend (ROAS).
  • More advertising budget control: Advertisers can adjust and set their targeted costs to establish a spending threshold within the ad exchanges. At the same time, they’re offered more advanced bidding capabilities which allow marketers and media buyers alike to maintain more control over their advertising costs.
  • More control over ad frequency: Advertisers are able to control how frequently an ad is served to the same users which helps them to avoid overexposure of certain ads and contributes to the “stalking’ feeling many users get from ads that seem to follow them everywhere online. This is what contributes to ad blocking, among other things, which all parties want to avoid.
  • The option to blacklist publishers: Just like publishers can block advertisers and ad networks, advertisers have the option to avoid certain ad inventories. If there’s a publisher they don’t want to be associated with for whatever reason, they have the option to blacklist that publisher to ensure that no ad slots are bought within the exchange from that particular publisher.

The Different Types of Ad Exchanges

There are a few different types of ad exchanges to know about, and each comes with their own benefits.

Here’s a quick look at each of them:

Open Ad Exchanges

An open ad exchange is the cookie-cutter virtual marketplace for open auctions. This type of ad exchange offers a very extensive range of ad inventories to all the advertisers participating on the platform.

Open ad exchanges are typically more preferred among advertisers that are looking to broaden their reach, which makes sense since the list of publishers on an open exchange is very broad. While open ad exchanges are excellent for newer advertisers in the ad tech world, these exchanges don’t offer much details regarding publisher information — which means it’s a hit or miss in most cases.

Private Ad Exchanges

Private ad exchanges — also referred to as private marketplaces (PMPs) — are closed exchange platforms. Closed exchange platform equals premium access to publishers, and PMPs are typically run by the publisher who selects the advertisers who can gain access to their ad inventories.

In private ad exchanges, publishers not only get to decide who can bid on their inventories but at what price and under which terms. The private platforms allow brands and publishers to also establish more direct relationships with both advertisers and ad agencies, which can lead to more negotiations and long-term partnerships.

Preferred Ad Exchanges

Preferred ad exchanges, also commonly known ad preferred deals, allow publishers to sell their ad inventories at a negotiated fixed price with their preferred advertisers. This creates a more customized approach to selling ad inventories.

With preferred deals, publishers can take advantage of generating a more stable ad revenue while advertisers get to benefit from more stable inventory pricing. It’s one of the best options for both parties involved.

Final Thoughts

Ad exchanges offer an efficient and effective way of buying and selling ad inventory. They connect all of the ad tech players via a single platform, allowing them to quickly exchange ad inventory and create beneficial relationships while also offering a wide range of parties to partner with.

Of course, ad exchanges are just one element of your ad stack. There’s a lot more to learn when it comes to how the ad tech ecosystem functions.

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