Adtech industry is known for its jargonish lingo. We love to come up with three-word acronyms and technical terms to describe the complicated ecosystem succinctly or at least we try to do so.
In fact, we have a whole category and a dedicated email series to explain complex jargons.
Not the most recent, but one of the prevailing terms of our industry is ‘bid shading’. In this piece, we’ll brief the technique (or algorithm or feature – whatever way you prefer to see it) and dive deep into the bid shading questions that have been thrown around a lot.
What is bid shading?
Bid shading, simply put, is a way to assuage the price surges – resulting from the shift to the first-price auction from a second-price auction. Before detailing, yes, it benefits both buyers and publishers and the intermediaries over the long run.
Bid shading refers to the predictive algorithm used by the DSPs (demand-side platforms) to find the optimal price to bid for an impression in a first-price auction. As you know, exchanges and SSPs are shifting from a second-price auction to the first-price auction. So, a media buyer who bids the highest price has to pay the same, rather than paying just 0.01 cents + second-highest price.
Let’s say $10 and $5 are the highest bids,
If it is a second-price auction, the media buyer who bid at $10, has to pay $5.01 for the impression.
If it is a first-price auction, the media buyer has to pay $10 for the impression.
Ideally, a buyer would like to avoid overpaying for the impression, as it directly affects ROAS. DSPs, considering the current shift, offer a bidding feature where past bid rate, website, ad size, exchanges, and other competitive dynamics are analyzed to set a bid – that’ll win the auction for the buyer without paying a hefty price. It would be high enough to beat other bids and stay within a reasonable price range (in between first and second bids).
Do SSPs offer bid shading?
At first, bid shading seems to a technique that decreases the publisher’s yield. Though it is true that buyers would pay less when they employ bid shading, you need to track the spending over the long term to see the benefit of the sell-side.
Aggressive bidding behaviors of exchanges and SSPs are degraded by the buy-side technologies as they’ll eventually decrease the ROAS for advertisers. DSPs primary job is to better the ROI, not the other way around. Hence, as soon as, they realize bidding on your inventory isn’t helping the buyer to achieve his/her goal (ROI, CPA, etc.), they’ll move the spending to a different publisher.
DSPs have grown smart over the last decade, thanks to the troves of data available to analyze, optimize, and predict. Without buyers, publishers will either switch to a different SSP in the market or keep leaving money on the table. All of this is to say, SSPs need to ensure they consistently get competitive bids from DSPs (buyers).
Initially, SSPs provided bid shading to stabilize publishers revenue (and of course, theirs). With the DSPs adopting the technique, we can’t surely say that all the SSPs are going after it. That being said, some SSPs are open about their bid shading offerings.
For instance, Rubicon Project publicly announced that they provide bid shading (optional to use). PubMatic, another SSP said they have their bid shading algorithm to stabilize demand for the publishers.
Bid Shading Factors
As it is provided by an adtech partner you work with, there are no standard set of factors to lean on. However, as we mentioned earlier, site, ad size, ad exchanges, and competitive dynamics are included while calculating the bid price. Because of the ‘black box’ nature, many buyers have criticized the vendors.
Where are we headed?
Interestingly, many advertising sources believe bid shading isn’t entirely new. DSPs and SSPs have long been analyzing historical bid data and auction dynamics to optimize and improve their products. Generally speaking, some aren’t just offering ‘bid shading’. Goodway Group, for example, developed an algorithm that enables it to calculate a bid – based on the expected conversion rate from the impression and client’s CPA goals.
In case you don’t know, Google Ads do this too. Those who can’t afford to develop their own technology has to rely on DSPs to come up with the right bids and avoid overspending.
On the sell-side, publishers don’t have to take any measures as they don’t have any control over bid shading. As the industry is shifting to first-price auctions, bid shading will likely be in use.
What will be the impact on publishers’ revenue?
Publishers wouldn’t see any substantial change in their revenues. Many DSPs have adopted some form of bid shading as the shift to first-price auction started a few years ago. That being said, Google Ad Manager, the most-used ad server is transitioning over the course of the year. So, you might experience a lift in your ad revenue.
Have more questions? Let us know in the comments.