In March, Google announced that AdX and AdMob will be joining the likes of the other key exchanges and transitioning from a second-price to a first-price auction dynamic.
The conversion will occur gradually, with Google confirming that the plan is to have all auctions migrate to first-price by July 2019. So, what are the implications, and how can you stay ahead of the game and your competitors?
On a quest to reduce mechanic opacity
So-called auction theory has traditionally held that within first-price auctions, risk-averse bidders are more willing to bid higher to increase their probability of winning, and by doing so, inflate their utility function. Risk-seekers, however, will tend to reduce their consumer surplus – this is the difference between the price a consumer is willing to pay and the price they end up paying.
Both scenarios imply an increase in higher expected revenue for the supply side, and as a result, First-Price auctions are set to yield higher expected revenue than Second-Price auctions. But is this always the case, and can First-Price auctions actually improve demand utility?
Enter Header Bidding
Header Bidding enabled multiple Supply Side Platforms (SSPs) to enter into auctions simultaneously, maximising competition, improving fill rates, inflating publisher revenue and giving buying marketeers real-time access to all the best inventory. When Header Bidding was first introduced, the supply side became an opaque landscape tainted by hidden costs and inconsistent pricing. This auction had to become unified, and this mechanic had to be the first-price led.
On the face of it, a shift from a second-price auction to a first-price auction seems like a quick revenue-maximiser for publishers and an instant media-spend incinerator for advertisers. Amongst the traditional Waterfall mechanic, this would certainly be the case, but in a Header Bidding landscape, the net gains for both parties are not so black and white.
Weighing up the costs and benefits to the buy side
Initially, it seems indisputable that a transition from Second-Price to First-Price will decrease buyer’s consumer surplus by driving up CPMs. If bidding proceeds the same way it always has then this is undoubtedly the case. However, with the transition to Header Bidding, a tactical bidding strategy can yield significant gains relative to competitors. A transition to a unified First-Price dynamic should reap three key benefits to the buy side: Transparency, Consistency and Control.
Transparency will be attained through the obsolescence of Dynamic Floor prices and other hidden fees on the supply side. Uniform auction parameters will then breed both Consistency and Control, as buyers are able to purchase the inventory they desire. This new landscape enables buyers to directly influence win rates in a far more consistent way, without having to worry about other exchanges submitting bids higher than your second-price but lower than your initial bid.
How to finish first
The key to getting ahead of competitors, and maximising utility, stems from two paramount principles: Bid Shading and a Tactical Bidding Strategy.
Bid Shading exists in two forms. First, an algorithmically-fuelled automated bidding strategy within the Demand Side Platform (DSP), such as Google’s Automated-Bidding function, and The Trade Desk’s proprietary KOA technology. Second, on the exchange side, Rubicon’s EMR (Estimated Market Rate) feature. Auto-bidding strategies use advanced machine learning to non-linearly optimise towards over 40 data signals to bid at an optimal level in every auction. This data-led bidding model informs competitive bids regardless of the auction type. Google has hinted that exchange-led bid shading can influence the algorithm, as these add additional nuances and variables to an already murky muddle. It also seems that additional black box pricing on the exchange side is retrograde in the pursuit of transparency.
Tactical Bidding Strategy aims for bid optimisation that can only be unlocked in a transparent, unified auction scenario. The idea is to incrementally increase your bid, monitoring win rate delta at each point to find an optimal level. This level of transparency would put the control back in the hands of the buyer and improve your utility function where competitors are not.
Ditch the second-price mindset
To put it simply – you are going to lose if you are bidding with a second-price mentality in a first-price auction scenario.
Redefine your bidding habits
The philosophy of “bidding high to clear low” was born and has now died along with the second-price auction. To evolve, marketers must use automation and informed strategy to capitalise on the ever-improving transparency. The transition to a First-Price auction was imperative for the development of real-time bidding from both a demand and supply perspective. The impact this will have on-demand utility will now be rightly defined by the buyers.
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