As companies build out their ad businesses, many get lost in the myriad of available auction options, especially after Google’s publicized shift to first-price auctions. Publishers wonder: should they use second-price auction logic? Or first-price? Or, should they abandon auctions altogether and just rotate ads evenly?
To aid in these decisions, this article defines different auction methods, helping publishers decide which model works best for their ad business.
Publishers run ad auctions in order to maximize their revenue. Auction logic is used by the ad decision engine to select the ad that is most likely to deliver the highest payout. If ten advertisers bid for one ad slot, the ad server would select the advertiser who is bidding the most.
Otherwise, the most common ad selection method is what we call “lottery” - aka, ads are picked randomly from the eligible candidates, regardless of what an advertiser is willing to bid. This could also be called “even rotation.” As part of this, each ad may also be assigned a dynamic “weight” to ensure it hits any predefined goals (impressions, clicks, etc.).
Each publisher has different needs and commitments to their advertisers.
You might consider running auctions if:
You might stick with lottery selection if:
Essentially, auctions are optimized to maximize your revenue when demand outpaces supply, whereas lotteries are better when your pricing model is simpler, with fixed bids or guaranteed volume amounts.
There are two main kinds:
First-price auctions are straightforward: what you bid is what you pay. If three advertisers bid $2.00, $2.50, and $3.00 respectively, $3.00 is the winning bid, and the advertiser pays $3.00, as seen in this example.
Publishers use first-price auctions because they:
In second-price auctions, the winning bid pays $0.01 more than the second-highest bid. If advertiser A bids $2.10, B bids bid $2.80, and C bids $2.50, B would win and pay just $2.51 ($2.50 + $0.01).
At first glance, this may seem inferior to first-price, but there are reasons to contemplate second-price.
Publishers use second-price auctions because they:
Whether you want to do first or second price auctions, employing auction logic for selecting a winning advertiser can get tricky based on your pricing model.
The simplest method is to have all your advertisers bid via CPM (cost per thousand impressions). You’d then select the advertiser with the highest bid, maximizing your revenue.
But what happens if you want to offer CPC (cost per click) bidding, where advertisers set their desired CPCs? This adds a level of complexity, as the highest bidder doesn’t necessarily maximize your revenue. If someone is willing to pay $10 per click but nobody clicks on their ads, you make $0 from them. Meanwhile, if someone is willing to pay only $1 but gets clicks, you are better off selecting the $1 bidder.
With CPC bidding, therefore, the bid is important, but so is the expected click-through rate (CTR). And if you want to do cost-per-action bidding (CPA), you also have conversion rates to consider.
As you build your ad business, we don’t recommend writing a non-CPM auction algorithm yourself. It’s difficult and involves having to calculate an expected-cost-per-mille (eCPM) based on historical performance for every ad. Instead, we recommend working with a third-party ad server, or, if you want to build the ad platform in-house, integrating with Kevel to get all that logic instantly.
If you work with a third-party ad server - or use Kevel’s ad infrastructure APIs - you get auction logic out-of-the-box. Depending on the tool, you should have the ability to toggle first or second-price, as well as set rules for auctions vs. lottery/even rotation.
If you want to build auction functionality yourself, we recommend working with a data scientist to develop the algorithm needed for more complex auction decisioning. Your tech team would then need to incorporate this logic into your ad selection engine.
Of course, that path could take months and countless engineering hours. It takes time to customize auction logic and ensure it’s up-to-date with current tech innovations.
That’s why companies like Ticketmaster, Klarna, and Yelp are increasingly turning to Kevel to easily incorporate auction logic into their in-house ad platforms. To learn more about how to do it too, contact us today.