Last month Google rolled out first-price auctions, which—because they are Google—means that now everyone else will follow suit. First-price will be the universal method for the $48 billion programmatic market. To provide some perspective, that’s the same size as organic food sales in the U.S., the cannabis market worldwide and the entire wearables industry.
First-price means the winning advertiser pays exactly what they bid. This, versus second-price, which awards the auction to the highest bidder, means they pay only slightly more than the second highest price that was bid.
Up until now, second-price auctions were the standard. Advertisers liked them because they could avoid the winner’s curse, where they were stuck paying a price that may be grossly over what its true value is. Supply-side platforms liked them because they often would raise their price floors after bids came in, which allowed them to get extra money from advertisers and DSPs.
As of March 2018, the share of impressions being sold first-price was at 43.3%, up from 5.8% three months previous. But now with Google rolling it out, that share is going to skyrocket. I wouldn’t be surprised if it hit 90% by the end of the year. All advertising platforms will be shifting to the first-price model; it’s now inevitable.
Here’s the thing, though. No one likes change. And when it messes with pricing, people really don’t like change. It’s like the stock market. As a public company, you can change constantly as long as it doesn’t negatively impact your stock price. Volatility in a person makes them interesting. Volatility in pricing makes it scary.
Fortunately, we moved to first-price six months ago and have been through what you’re about to experience. I’m going to tell you exactly what happened so you can project what will happen when you or your ad platform makes this shift and what to do about it.
We had some resistance from our DSP partners because they were concerned that they would overpay for an impression and never know its true value. Performance bidders were worried that prices would get too high and negatively impact their take rate or that it would be too expensive for them to clear, which drives spend down. And everyone was wondering what it would mean from a technical standpoint.
Technically speaking, there are actually very few adjustments because the recent IAB specs already have options for both bidding types. If partners are confused about the model, explain what it means to pay what you bid and give assurance that pricing volatility will be short-lived. Emphasize the benefits of greater transparency because buyers have more insight into pricing, and publishers will get more reporting on bids.
We did see a spike in overall spend for about a week. But as bidder algorithms recalibrated, it leveled back to what it was before. After the plateau, we saw that this was a win/win for both our publisher and DSP partners. Our demand partners saw a higher win rate and a higher impression (or play) rate as a result. As they gained more buying power, overall bidding became more efficient. App developers saw their fill rate increase while yielding higher eCPMs.
And that’s it. No, really, that is what you can expect. For such a major change in a pricing model, it’s almost anticlimactic, but the lesson here is to trust your technology. Decision-making engines were built to be able to understand which impressions are valuable and determine how much you should pay for them. They know what performs well and what doesn’t. And technology, unlike human behavior, is flexible and can adapt to changes in the pricing system.
So, step up and make the investment to get on board with first-price auctions. If you’re a platform, it’s a strategic investment. If you’re a brand or agency, it might be more of an emotional one, understanding the implications and being OK with the shift. And while some say that bid shading, where the winner pays halfway between the first- and second-price winning bid, is a good compromise and limits risk, I ask why we believe there is too much risk when there’s isn’t. Also, that comes with a price; don’t assume that you’re not paying in other ways (e.g., covering the cost of the bid-shading tool).
What we need now is for everyone—buyers, sellers and those in between—to be all-in. Because first-price auctions are an important step toward transparency. It encourages a more honest pricing structure, which is an important move in a space where trust and transparency continue to be a sought after commodity.