Bid Shading - Is Price Floor A Lost Game for The Publishers?

Cognitiv created a stir in the market with its research on Bid Shading - $6.6 Million left on the table by the advertisers. Claiming it to be a blunt and unsophisticated tool, the research revealed -

“A third of Digital Media Buyers do not even know that bid shading exists, with only 35 percent of Digital Media Buyers “extremely confident” in their understanding of how a bid shading algorithm works and that they could explain it to others. Yet, 70 percent are paying an extra fee for this tool that they do not fully understand, blindly trusting that it is saving them money.”

Programmatic advertising is a complex interplay of outdated technologies and cutting-edge innovations, presenting both significant opportunities and hidden pitfalls. The ability to identify and leverage the optimal solution is paramount. To navigate this intricate terrain, a deep understanding of the buy-side pricing mechanism is essential. 

This includes strategies like bid shading, a technology that employs predictive algorithms to optimize bidding strategies. By analyzing historical placement clearing prices and comparing them to a buyer's maximum willingness to pay, bid shading algorithms can determine the optimal bid amount. This intelligent approach enables buyers to secure ad placements at competitive prices while maximizing their return on investment.

To gain a deeper understanding of the ins and outs of bid shading – we will be explaining the bid shading from a different angle! Let’s get started 

What is Bid Shading? A Game Changer or Challenger

Bid shading is the algorithm-based solution with which DSP (and some of the SSPs) set the average bid for each impression, thus saving advertisers from overspending. It helps advertisers win impressions on ad space at the lowest possible price while still achieving their campaign goals.

Bid shading evolved out of necessity when the “second-price auction” transitioned to the “first-price auction”. 

Second-Price Auction

Also called the Vickery auction, the mechanism works backward. Advertisers will bid whatever they think the ad inventory is worth. However, the winner will have to pay just $0.01 extra to the second highest bid.
Suppose there are four qualified bidders in an auction. Bidder A bids $4, B bids $5, C bids $2, and D bids $8. The winner here, of course, will be bidder “D,”. But now he will be paying $5.01 for the same inventory instead of his initial bid of $8. 

Drawback for publisher -

Although the second-price auction created a competitive environment for the publishers, it also created the probability of money being left on the table. The second-highest bid might not be the correct market value of their inventory. 

First-Price Auction

A sealed-bid auction, the bidders here submit their bids, and the highest bidder wins and pays their exact bid amount.

So, if we consider the same example shared above, here, the winning bidder will be Bid “D” and the amount to be paid will be $8. Smells overpaying, doesn't it?

This change demands more strategic bidding from advertisers, as they risk paying their full bid amount. 

Drawback for publisher -

The direct correlation between bid and payment can lead to higher revenues per impression, assuming advertisers are willing to bid aggressively to secure premium ad spaces. 

However, the transition also requires publishers to more accurately price their inventory more accurately, as overpricing can deter bidders while underpricing can lead to revenue loss. The increased revenue potential comes with the need for greater market insight and pricing strategy refinement.

How Bid Shading Works?

Bid shading works on algorithms. It analyzes a vast array of data points, including historical bidding data, the specific characteristics of the ad inventory, and real-time bidding dynamics. With this, the algorithms calculate a bid that is strategically lower than what the advertiser would be willing to pay in a maximum bid scenario but still competitive enough to win the auction. 

The "shaded" bid, therefore, represents a compromise between the outright aggression of a first-price auction bid and the bargain-seeking nature of a second-price auction bid.

Introduced by DSPs and some SSPs, bid shading emerged as advertisers' response to first-price auctions. The goal is to find the sweet spot where the bid is still high enough to win the impression most of the time but low enough to avoid overpaying significantly. And the platforms will take their share out of the amount saved per campaign.

Challenges for Publishers -

• Revenue dilution: The primary concern for publishers revolves around the potential decrease in ad inventory prices. Since bid shading systematically aims to lower the bid price, the average selling price often drops, leading to diminished ad revenue.

• Market power dynamics: The technology and data analytics prowess behind bid shading are predominantly in the hands of a few dominant advertising platforms and networks. This concentration of power skews the market dynamics, leaving publishers with less leverage and forcing them to accept lower prices for their inventory.

• Hidden costs: Some forms of shading involve manipulating factors like viewability metrics, making it hard for publishers to assess the true value of their inventory and potential revenue loss.

• Technological disparity: Understanding and responding to sophisticated shading strategies require significant technical expertise and resources, which may not be readily available to all publishers.

• Fragmented landscape: The use of multiple ad exchanges and SSPs with different shading practices further complicates pricing transparency and revenue optimization for publishers.

How Price Floors Can Help Publishers Push Back Against Bid Shading?

Bid shading—a sneaky cost-cutting move by advertisers in programmatic auctions—might save brands a few bucks, but it’s a thorn in the side for publishers. By letting buyers bid just enough to stay competitive without overspending, it chips away at publisher revenues. So, what’s the counterpunch? 

Price floors!

Here’s why smart publishers are leaning on price floors to keep the revenue flowing:

1. Protecting Revenue

• No Bargain Deals: Price floors ensure you’re not giving away ad space for peanuts. They establish a baseline, even when advertisers try to outsmart the system.
• Blunting Bid Shading’s Impact: With price floors in place, underbids will not drag your revenue down to unsustainable levels.

2. Preserving Your Inventory’s Worth

• Premium Stays Premium: Your high-value ad placements will get its worth. No undercutting here.
• Avoiding a Race to the Bottom: Once your inventory starts selling too cheap, you cannot convince buyers it’s worth more later. Price floors help you steer clear of that pitfall.

3. Driving Better Yield

• Supply Meets Demand—Profitably: With floors, you’re not just filling ad slots; you’re ensuring those slots are filled at rates that make sense for your bottom line.
• Healthy Competition: By setting competitive (but fair) price floors, you push buyers to up their game. That means higher bids, not just more of them.

4. Regaining Control Over Pricing

• Your Rules, Your Revenue: Price floors give you the power to dictate terms, not the algorithms. That’s crucial in a world dominated by exchanges and demand-side platforms (DSPs).
• Quality Over Quantity: Price floors can help weed out advertisers who don’t align with the value of your inventory.

Bid shading in programmatic advertising is just one of many challenges. Price floors give publishers a tool to level the playing field, reclaim pricing power, and safeguard their ad inventory’s value. 

Staying ahead means staying strategic—set your floors wisely, keep an eye on the market, and watch your revenue climb.

Bid Shading Vs. Price Floor: Ways To Optimize Price Floor!

The Top 3 Strategies for Publishers to Counteract Bid Shading

Loss or no loss, one thing is sure. The way buyers bid for your inventory has advanced for Good. Now, it’s time for you to ramp up and respond.

1. Invest in technology

The market today is ruled by those who are ready to adapt to advancement. It’s time to flex the algorithmic muscle. 

Dynamic flooring is one such technology that you can use to claim your power in the pricing ecosystem. Solutions like Mile’s Dynamic Flooring are built on ML modules. Here, the algorithm goes deep into granularity-

• Data analysis: Utilize machine learning algorithms to analyze historical data, current bidding patterns, and market trends to set optimal price floors for each impression in real-time.
• Micro-segmentation: Implement dynamic price floors for different inventory segments based on the above data and factors like device, audience demographics, and content type.
• Feedback loop: Leverages feedback loop (reinforcement learning) to observe how bidders are engaging with the set floor and adjust price floors proactively to capture maximum fill rate.
• Predictive modeling: Leverage predictive analytics to forecast future bid trends.
• A/B testing: Continuously test the impact on fill rate, revenue, and overall effectiveness.

Result, inventories sold at their best market price!

Mile’s Dynamic Flooring is available for the Prebid environment. You can use UPR for GAM. Amazon TAM and UAM come with their own pricing mechanism. 

2. Capture more data

By sharing data and insights, publishers can gain a more comprehensive view of the advertising ecosystem, including advertiser behaviors, market trends, and pricing strategies. This collective intelligence can enhance publishers' bargaining positions and enable more informed decision-making.

• Create consortiums with other publishers to share bidding data, gain market insights, and collectively negotiate better terms with ad exchanges and DSPs.
• Partner with data providers to access insights into advertiser behavior, market trends, and audience demographics to set strategic price floors.
• Advocate for industry-wide standards on bid shading practices to increase transparency and create a fairer playing field for publishers.‍

3. Worship your users

Utilize technology like AI to personalize the ad experience based on user context, preferences, and real-time behavior. Create a more immersive and engaging experience for users and potentially command premium pricing.

• Design ad formats that engage users through gamified experiences, increasing ad recall and getting auctioned at higher CPMs.
• Implement real-time auctions within the ad unit, allowing users to influence ad pricing based on their engagement or choices.
• Offer micro-rewards or incentives to users for engaging with ads, promoting positive user experiences, and potentially attracting high-value brands seeking engaged audiences.

The Game Is Afoot (Not Lost)

Success is always there. The question is how willing you are to innovate and push the boundaries. 

Embrace data-driven insights, explore unconventional solutions, and continuously adapt to the ever-evolving landscape. This strategic standoff can only shape the balance of power, pricing dynamics, and, ultimately, the revenue outcomes in digital advertising markets. 

By taking charge of innovation, you can transform from passive participants to active players, ensuring your voices are heard and your value is recognized in the digital advertising game.

FAQs on Bid Shading 

1. What is the bid shading?

Bid shading in programmatic advertising, offers publishers and advertisers a smarter way to navigate first-price auctions. By leveraging historical bid data and impression value estimates, this technique recalibrates bids, ensuring advertisers avoid overpaying without compromising their campaign reach. For publishers, it could mean a more sustainable and competitive ecosystem.

The numbers speak volumes: advertisers report cost savings of up to 20% compared to traditional first-price auction models. In 2023 alone, bid shading was responsible for 6% to 37% of global programmatic ad spend, translating to a staggering market value between $6 billion and $40 billion. 

At its core, bid shading relies on algorithmic efficiency—analyzing bid history, ad size, site performance, and win-rate metrics to fine-tune optimal bid prices.

2. What is the bid process with bid shading?

The bid process with bid shading in programmatic advertising involves several steps, enhanced by algorithms to optimize bid prices. Here’s the breakdown - 

• Ad Request: When a user visits a webpage or app, an ad request is sent from the publisher's supply-side platform (SSP) to an ad exchange.
• Auction Initiation: The ad exchange conducts a real-time auction where multiple advertisers bid for the ad space.
• Bid Submission with Shading: Advertisers submit their bids through demand-side platforms (DSPs). Bid shading algorithms analyze historical bid data, ad size, site statistics, and win rates to predict the optimal bid price. This helps advertisers avoid overpaying in first-price auctions by estimating what the winning bid would have been in a second-price auction.
• Winner Selection: The highest bid, adjusted by bid shading, wins the auction. This ensures that the advertiser pays a competitive price without overbidding.
• Ad Display: The winning ad is displayed to the user on the publisher's site or app.
• Payment: The advertiser pays the shaded bid amount, which is typically lower than the original bid but still competitive enough to win the auction.
• Impact on Publishers: While bid shading can reduce the price per impression, it often leads to more consistent demand and higher fill rates, potentially stabilizing or even increasing overall revenue.

3. What is bid shading in second price auction? 

Bid shading in a second-price auction takes a more old-school approach, calculating a discount by splitting the difference between the highest and second-highest bids. 

Essentially, it works by finding the median between the two, creating a middle ground that mimics the dynamics of first-price and second-price models. While less common today, this method offers a rudimentary way to prevent overbidding in transitional auction setups.

4. How bid shading can affect your ad auctions as a publisher?

Bid shading can subtly reshape your ad auction dynamics as a publisher. While it helps advertisers avoid overpaying in first-price auctions, it often results in lower CPMs for individual impressions—sometimes dropping by 15-20%. However, at times the trade-off isn’t all bad. By making bids more competitive and appealing to advertisers, bid shading can increase demand consistency and improve fill rates. 

This stability can lead to more predictable revenue streams, even if the per-impression payout takes a hit. The key is to monitor how bid shading impacts your overall revenue mix and adjust floor prices or inventory strategies to maintain profitability.