A Year In First-Price

The Sell Sider” is a column written by the sell side of the digital media community.

Today’s column is written by Rachel Parkin, senior vice president of strategy and sales at CafeMedia.

It’s been a year, give or take, since the dominoes started to fall in the direction of first-price auctions.

Our industry wasn’t fully ready for the rapid first-price pivot at the time, and even 12 months later, we aren’t in a better position to embrace all the benefits without facing some downsides, too.

Whether we like it or not, first-price, open-exchange auctions are here to stay. As the technology continues to evolve to handle complex bidding algorithms, private marketplaces (PMPs) provide an opportunity to explore which auction dynamic makes the most sense for an advertiser’s goals.

The reality of first-price auctions

First-price auctions bring much needed clarity and transparency to one aspect of the auction: pricing. Buyers today know exactly how much they bid for any impression, and there’s no longer a black box that obscures how much of that bid turns into working media on the publisher side.

First-price auctions also maximize access. Before, we had to contend with the inefficiencies of nonunified, second-price auctions that ran in parallel, which sometimes resulted in the buyer who valued the impression the most losing the bid. Now, the highest bidder always wins.

While first-price auctions theoretically simplify complexity on the sell side, they amplify complexity on the buy side. First-price auctions put more pressure on buyers to test their bids, and find the sweet spot between how low they can bid and how much they can win. No buyer wants to feel the remorse of overpaying. Many demand-side platforms (DSPs) and even supply-side platforms are working on technology, such as Rubicon’s Estimated Market Rate, to help advertisers navigate the ideal bidding strategy.

First-price auctions don’t solve for all forms of auction transparency. There may be other nontransparent auction practices that still occur, such as impression recycling. With DSP bid optimization systems, the black box pendulum could easily swing to the buy side, where it might be hard to trace the delta between a buyer’s intended price and what a publisher sees.

Private marketplaces and first-price auctions

While there is no choice about first-price auctions in the open market, private marketplaces present an interesting use case.

The knee-jerk reaction of some buyers in the first-price world was to switch to a fixed-price auction for PMPs. Yes, it’s a Band-Aid to put guardrails on pricing, but the fixed-price auction  is a step backwards. One gain for buyers from first-price auctions is the ability to directly control win rates through changes in the bid price – a fixed price comes at a cost of losing that control.

To the extent that SSPs allow configurable auction types, there is an opportunity to navigate which auction mechanics make the most sense for each buyer and campaign. The benefits of first-price auctions are different for different types of buyers, as are the bidding strategies. The flexibility of PMPs provide a test bed to evaluate how buyers and sellers can get the most out of first-price auctions.

Direct response buyers

First-price PMPs have many benefits for direct-response buyers, the OGs of programmatic. CPA-driven buyers typically know a lot about their consumers, and the bid price varies to reflect whether someone simply browsed relevant content or added an item to their cart.

In a second-price PMP, whether a buyer bids $15 or $6, both bids could be reduced to one cent above the second-highest bid, which would be $5.01 assuming a $5 second bid. If a low valuation is passed into the ad server, the buyer may miss out on the opportunity to reach a valuable customer.

The catch is these advertisers actually want to win the valuable impressions identified by their data. First-price PMPs pass the exact bid valuation into the ad server and give the buyer much more control over the win rate. That’s a huge advantage of first-price auctions, and it ensures the buyer can effectively scale on the impressions they want to win. The major change in bidding strategy is to only bid $1,000 if you want to pay $1,000, and to bid based on the real valuation of each customer.

Brand buyers

For brand buyers, who are often focused on KPIs such as viewability, on-target percentage or relevant context, the bid price tends to be the same across impressions. In this scenario, first-price PMPs become the ultimate fixed price. Many buyers assume first-price is more expensive, but that’s not necessarily the case with a shift in perspective.

In a second-price PMP, a buyer may bid $7 for every impression and pay an average CPM of $6.25 for, say, a $6 floor. Rather than bidding the same $7 in a first-price PMP, the buyer can think about the floor rate as the first fixed price and start by bidding at the $6 floor instead. A buyer can gradually increase the bid price – $6.05, $6.10 and so on – until they achieve the desired win rate. In this way, buyers can set a flexible fixed price at any point above the floor.

For some brand advertisers, though, there isn’t any harm in staying with second-price PMPs. Even though exchanges at large operate on a first-price basis, the highest bid will still win, and these buyers will pay just the second price. Second-price makes it easier to manage the bidding strategy and bids across publishers, as buyers can set one max bid price they’re comfortable paying, and the actual CPM will adjust automatically. If second-price is still what works best today, there’s no need for these advertisers to change.

Multi-advertiser deals

In cases where agencies set up multi-advertiser, always-on deals, a wide variety of buyers, including direct response and brand, are all bidding through the same deal. With a universal floor, second-price PMPs can limit the win rate.

Under that structure, a buyer with a high valuation could be less likely to win the impression they want compared to first-price PMPs. First-price PMPs effectively convert the environment to an unlimited fixed price, where each buyer can ensure their exact valuation is passed to the ad server, and as a result, win more of the impressions they want. When many different advertisers with different KPIs bid through the same deal, first-price maximizes inventory access while still allowing for a range of bids from high to low.

First-price auctions are here to stay. As the market and technology are still catching up to embrace it, PMPs provide a great platform to think about how sellers can support buyers in using first-price auctions to their advantage.

Follow CafeMedia (@CafeMedia_) and AdExchanger (@adexchanger) on Twitter.

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