Ad auctions and choosing the appropriate auction method are crucial components for publishers looking to build a successful ad business. But with so many options available, from various providers to methodologies, identifying the best ad auction strategy can seem overwhelming.
To help you navigate these decisions and determine which auction model best serves your ad business, this article will define different auction methods, compare and contrast first-price and second-price auctions, and discuss when it makes sense to use ad auctions altogether.
The Digital Marketing Institute defines ad auctions as, “The method used to decide the cost and placement of digital advertising on certain ad networks. A new ad auction occurs each time an ad is placed on an ad network.”
Publishers run ad auctions as a way to maximize revenue. Auction logic is leveraged by an ad decision engine to select the ad that is most likely to deliver the highest payout. For example, if ten advertisers bid for one ad slot, the ad server would select the advertiser who is bidding the highest, similar to how an auction is run in the real world.
Ad auctions step-by-step
A typical ad auction might look like this:
Waterfall auctions, also called daisy-chaining or waterfall tags, are defined by ClearCode as a process in which “...a publisher passes its inventory from ad network to ad network in descending order of importance until all impressions are (hopefully) sold.” Waterfall auctions are a byproduct of publishers’ efforts to eliminate unsold impressions, and due to a relatively simple technical setup, “waterfalling” is historically one of the most popular auction methods of choice.
The most common ad selection method is “lottery” -- also called “even rotation” -- in which ads are randomly selected from eligible candidates, regardless of what the advertiser is willing to bid. In this process, each ad may also be assigned a dynamic weight to ensure it hits predefined goals, like clicks, impressions, or more.
Every publisher has different needs and commitments to their advertisers, and the strategy that works best for you depends on your needs and advertiser relationships.
You might consider running auctions if:
You might stick with lottery selection if:
Essentially, auctions can help 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 of ad auctions: first-price and second-price. Let’s explore each and compare.
A first-price auction model is relatively straightforward: what you bid is what you pay. For example, imagine three advertisers bid $1.00, $2.00, and $3.00 respectively. $3.00 wins the bid, meaning the advertiser will then pay $3.00.
Historically, first-price auctions have not been widely used across ad tech, but they have become increasingly popular in recent years.
Publishers use first-price auctions because they:
A second-price auction model is when the winning bid pays $0.01 more than the second-highest bid. Using the same scenario in the previous section, if three advertisers bid $1.00, $2.00, and $3.00 respectively, although the advertiser bidding $3.00 would win, they would only have to pay the “clearing price” of $2.01 ($2.00 + $0.01) -- not their own bid of $3.00.
At first glance, this model might seem inferior to first-price, but there are several reasons second-price models have long been the industry’s preferred choice.
Publishers use second-price auctions because they:
Whether you want to do first- or second-price auctions, utilizing 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. These challenges have lent themselves to the emergence of auction strategies, like eCPM optimization and autobid.
As you build your ad business, you can find that writing a non-CPM auction algorithm yourself is difficult. The process involves complicated calculations of an expected-cost-per-mille, or eCPM, based on historical performance for every ad.
Working with a third-party ad server can eliminate that work for you, or, if you want to build an in-house ad platform, integrating with Kevel can grant you access to that logic instantly.
Autobidding, also called automated bidding, is another way advertisers can have more control, allowing them to specify a select few of their objectives and constraints, like which products they want to promote. Internal bidding bots will then do the rest through ML/AI algorithms to determine an optimal bid and dynamically adjust in response to changes in the bidding environment.
Advertisers often have a specific goal in mind for their campaign’s success but may struggle to determine the optimal bid. Autobidding helps by taking the guesswork out of things, and according to Google Internal Data, more than 80% of Google advertisers utilized autobidding in 2021.
With Kevel’s Autobid feature, for example, advertisers only need to input their desired return on ad spend (ROAS) goal and maximum CPC bid. Kevel’s advanced ad decision engine handles the rest by automatically adjusting the CPC bid to optimize toward achieving the target ROAS goal.
Key benefits of autobidding include:
Publishers generally offer three main pricing models for their direct-sold inventory: CPM, CPC, and CPA.
Other questions to ask yourself when deciding your ad auction pricing model should include: Who are my advertisers? What are my competitors doing? How much risk and complexity do I want to take on? For a more in-depth exploration of pricing models, and how to determine which pricing model works for, check out our blog on it here.
Kevel’s ad infrastructure APIs offer auction logic out-of-the-box. Depending on the tool, you can toggle first- or second-price, as well as set rules for auctions vs. lottery/even rotation. Kevel also offers eCPM optimization and Autobid features.
Criteo runs Open Auction campaigns through first-price auctions on a CPC model. Advertisers can choose the bid they’re willing to pay every time a shopper engages with their ad and take part in the inventory auction to win the placement.
Topsort offers auction-based sponsored listings, banner ads, and video ads monetization, and specializes in AI for Auction tools and New Age Infrastructure APIs.
Google Ad Manager runs Open Bidding via a “server-to-server” integration between publishers and their demand partners. Once an ad request is generated, Ad Manager runs a unified auction to determine an appropriate yield, enabling third-party demand partners to compete for inventory in real-time.
Moloco runs auctions driven by various ML techniques, which leverage event data provided by their advertisers. This technique allows them to build lookalike targeting models that show advertisements to other mobile app users in similar existing user bases as the advertiser’s target audience.
CitrusAd itself is an auction-based ad platform which allows advertisers to create advertising campaigns that are displayed on each retailer's e-commerce website. Advertisers bid to promote their products at the top of a retailer's website, and can track the performance of their products in real time.
The ad units that work best with auctions are typically those with a high number of sellers, allowing for competitive bidding that can drive up prices. Auctions are not well-suited for high-dollar inventory, like carousel ads. Let’s take a look at some ad units that work well with auctions.
Sponsored listings, also called promoted listings or sponsored ads, are organic listings that are promoted or highlighted in some way, usually located at the top of search results. They are an innovative way to drive revenue from advertisers seeking more visibility, without having a detrimental impact on sales or user experience.
Native ads are seamlessly integrated into your feed, homepage, search results, and more. Often, these native ads look identical to your standard content, expect with an added “sponsored” or “promoted” tag. Native advertising was a nearly $100B market in 2023 and is an innovative, engaging alternative to standard banner ads.
Banner ads are ads displayed on a publisher’s site in rectangular formats known as “banners.” This kind of display advertising can capture users’ attention and drive traffic to a brand’s site or help generate overall awareness.
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 DeliveryHero, Flink, 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.
