Technically Speaking: The buzz behind bid shading
Agencies and marketers will have to make a few adjustments when Google adopts first-price auction mechanics, a move happening soon, if gradually. The upshot: Marketers are expected to pay more for ads, while publishers pocket the extra change. Industry experts, meanwhile, seem conflicted about whether the implications will be short-lived or have a long-lasting impact.
Until now, Google used second-price auction mechanics, which is similar to buying something on eBay. For example: If the highest bidder bid $10 for an ad, and the second-highest bidder bid $3, the winner would pay $3.01, or just a penny more than the second-highest offer.
The broader programmatic landscape had been moving toward first-price auctions for some time, but Google had remained on the sidelines, perhaps waiting to see how things unfolded. Because almost all publishers and marketers use Google's tools to buy and sell ads, its decision to use first-price auction mechanics will likely be far-reaching.
Its decision "cements the new rules of engagement going forward," says Matt Prohaska, CEO of Prohaska Consulting. Central to those new rules is a new buzzword that's gaining traction in the space: Bid shading.
First-price auctions mean that what someone bids is what they pay—which means some are clearly overpaying. Because ad buyers grew up in a second-price world—and because demand-side platforms, used by marketers to buy programmatic ads, were designed to serve such a model—marketers wonder how they can hedge against overpaying.
This is where bid shading comes in to help soften the blow. Here's how it works, according to Anthony Katsur, senior VP of digital strategy and operations at Nexstar Media Group: A demand-side platform bids $10 on an impression on behalf of a brand. Using the data at its disposal, the DSP sees the actual value for the ad is $2, so they adjust their bid to $2.50. The ad seller collects $2.50, but the brand pays the DSP provider 20 percent of what was saved from the initial $10 bid.
Depending on whom you ask, bid shading is either part of the problem, or its solution.
"Bid shading is moneyball," says Jon Bond, founder of marketing consultancy company Tomorro. "It's good while it's working, until it's not."
"Bid shading is why we can't have nice things in digital media, as it's inherently non-transparent," says Katsur. "It will result in the same chicanery we saw in second-price auction environments." He adds that most marketers aren't armed with the data-science expertise in-house to validate bid shading algorithms. "I don't believe most marketers have been educated on bid shading, but they should [learn] about it lest they be taken advantage of yet again."
Some say bid shading will not have a long-term negative impact for buyers.
"Google is a big player, and any marketer or ad firm that has invested in custom or proprietary technology optimized for a second-price environment is probably going to be frustrated—initially," says Kate Canel, director of performance media at digital agency The Shipyard. "Short-term, this is bad for the buy side. … Long-term, however, buyers should see increased bid efficiency and publishers will see decreased revenue under the first-price auction model."
Brands seeking transparency from demand-side partners should request and analyze raw bid logs, where both the original bid and the cleared price are provided—yes, a cumbersome process. Players such as MediaMath, Google and other large DSPs also offer bid shading tools (some charge a fee).
Still, much of the onus will be placed on demand-side platforms, says Freddy Luong, manager of automated trading at Xaxis: "Since DSPs are putting out a bid for buyers, they should be bidding at an appropriate price for an impression. In a first-price auction world, DSP algorithms need to adjust so the correct bid is placed, and that the buyer does not overbid."
At the very least, moving to first-price auction mechanics has prompted many brands to pay attention to how they're buying ads. "Bid shading has created a level of awareness on the buy side," The Shipyard's Canel says. "Prior to its emergence, many marketers were unaware whether they were bidding in a first- or second-price auction environment."
Brands are also starting to ask what's happening behind the scenes. "We're hearing a need for education: 'What is bid shading, how does it affect my campaigns, what are the advantages?'" Danny Macdonald, VP of investments and partnerships at Xaxis, says.
Yet in an industry clamoring for increased transparency, bid shading itself is yet another black box of data, so marketers won't know if their DSP partners are actually efficient.
"We must continue to challenge the major players in the programmatic ecosystem and ask where is the true value for the brand marketer?" Canel says. "If the focus really is on value, then why the focus on bid models instead of transparency in the marketplace?"