Response: Will We Really Grow Display By Incentivizing Low Bidding?

Today’s column is in response to “Second-Guessing the Second-Price Auction Model” and written by Jonathan Wolf, Chief Buying Officer at Criteo, a buy-side, display ad tech company.

Esco Strong at Microsoft wrote an interesting piece in a personal capacity on this site this week. While I am and remain a fan of Esco, and his piece was elegantly argued, I strongly disagree with it. As I see it, there are two options in building a long-term business: by pricing transparently, or by taking unfair advantage of your customers. Only the first seems sustainable to me.

I am sure that 99% of readers’ eyes glaze over as the discussion moves to auction theory, dynamic floors, and other arcana. So let’s take two simple, real-world examples:

Example 1: “Dynamic Pricing”

Imagine going to the grocery store and buying what you thought were $85 worth of groceries but instead getting a bill for $133. “Why?” you might ask … “Because”, the grocery store replies, “we deduced you’d be willing to pay $140 for those groceries.” Meanwhile the same basket of groceries is a different price for someone at the next aisle, because they were only willing to pay $100. You’d rapidly stop buying from that store.

Example 2: “First Price Auctions”

Imagine you decide to bid for something on an eBay auction. When you choose your bid, you expect that the price you’ll pay will be the 2nd highest bid +$1. Therefore you are happy to bid your maximum price. Continuing the example, if you bid $100 for a tennis racket and the second bid is $50 you owe $51. Instead, imagine if you now had to pay $100 for that racket? You’d be angry, and soon you’ll figure out that you should bid much less than your “true value”.

Laughable you might think, but actually these are both examples of how some publishers and exchanges are selling their inventory. We believe there is a simple rule: if you wouldn’t like it in normal life, you can bet that we buyers of display won’t like it either. Sure, in both these pricing examples, there’s short-term money to be made by the publisher, but it’s at the expense of long-term revenue. And when buyers wise up to being gamed, inevitably you end up worse off than when you started.

It’s my strong belief that dynamic pricing and first price auction models will lead to fewer impressions bought and a reduction in bid prices, reducing growth and revenues for both publishers and advertisers. Yes, publishers are in an environment where competition is less developed than it will be in 12-24 months time, but these are terrible solutions that will rapidly destroy value for those same publishers. This is exactly why most premium publishers use a floor price in situations where demand is not yet mature enough.

As Mike Baker at DataXu wrote recently about these engineered pricing models, “Who wants to have ‘winner’s curse’ and find themselves buying something they could have gotten cheaper by underbidding the true value, but high enough to beat the competition? Perhaps sellers should think twice before they take this approach. This is not a zero-sum game.” I agree. An auction with a fixed floor, as seen with eBay, Google search, or in offline auctions, is the mechanism that creates the most value for everyone.

So … What Should We Do?

I believe two things: (1) a buyer needs transparency about how the publisher determines price (e.g. first price, second price, or some complex blend based on past bidding), and (2) a fixed floor price + second-price bidding maximizes long-term value for the publisher.

As buyers if we get both these things, then we bid full value – and as a result we maximize the size of the business we do – the clicks we send to our advertisers, and the money we spend with our publishers. Because the majority of our over 2,000 advertisers have uncapped budgets this creates a positive feedback loop – and explains why we are the largest performance buyer for many publishers across the world, paying CPMs that have meaningfully lifted their yield.

Esco’s conclusion that we should move to first price seems highly counter-intuitive. The immediate feedback from our business intelligence team, who would have to live with the repercussions of first price, is informative:

First price auctions are a huge pain to bid on, as each bidder needs to spend effort guessing what the second price is, in order to get the best price. If we think an ad is worth $10 to us, we still only want to pay just what is needed to win the auction, whether this is in a First Price or a Second Price auction. If we’re smart we’ll guess that the next bidder is only willing to pay $5, and so we’ll bid $5.01.

This is exactly the same outcome that we would have got in a Second Price auction, except now with all the risk and potential inaccuracy in guessing the Second Price. And if we were wrong and the second price was $6 we fail to show the ad and the publisher makes less money because we should have bid more than $6.

Conclusion: we waste lots of effort building technology to figure out the bidding landscape, that we could have used to improve volume of clicks and conversion rates for our advertisers.

Of course in the real world, one of two things happen:

1. We just significantly reduce all our bids with publishers who behave like this. It takes away a lot of complexity and removes any risk. We will lose some bids, but make more money on everything we still win. The result is that we make a little less margin, while the publisher makes a lot less money.

2. Buyers with very large budgets move to a situation where we negotiate fixed prices with publishers to run our ads ahead of RTB. Dealing with a fixed price buy is much simpler for us to deal with.

To conclude, as an industry we have a choice. We can consider the size of the display industry as a fixed pie, and fight to the death between publishers and advertisers on who captures the most value. Alternatively, we could agree to industry “Principles of RTB” that incentivize buyers to bid fair value and publishers to support this, and therefore focus on applying more technology to display so we can dramatically increase the total size of the display industry.

I vote for the second.

Follow Jonathan Wolf (@jwolf), Criteo (@criteo) and AdExchanger (@adexchanger) on Twitter.

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  1. Good response, but it still does not address the main point made in the previous article. The reason publishers/exchanges/sell platforms are putting these dynamic floors in place is because a “true” second price auction isn’t taking place. DSPs do not return 2 bid responses per bid request in RTB even when they have 2 or more eligible campaigns to serve. Because in their own self-interest they don’t want to second price themselves. That would be fine if there were 100 DSPs bidding on every impression and advertiser budgets were widely dispersed across all of them (god help us). But the reality is that the top 5 DSPs control the vast majority of advertiser’s programmatic budgets. So the failure to submit a 2nd bid drastically limits the number of bids on a given impression and the ultimate charge price in the 2nd price auction.

    I don’t have a great sell-side anology for this, but suffice to say that most sellers don’t want to particpate in that form of a 2nd price auction scenario. At least not without having higher floor rates in place (as was mentioned). And rather than putting their finger in the wind and choosing a floor CPM maybe they’d like to take a look at overall bid behavior from all bidders, and determine what their optimal floor price should be to increase maximize revenue contributed through RTB on their inventory. And since that’s a lot of data it might make sense for their platform to build a mechanism to do that for them automatically.

    I get that some exchanges aren’t exactly doing what’s prescribed above. They’re just looking at the bid price as it comes in, discounting it (randomly) 10-30% below that bid price, and returning that as the charge price. That’s obviously not a good long-term solution and buyers should shift their budgets away from platforms using that method and driving down campaign ROI.

    But to criticize dynamic floors in general, while ignoring their root cause and the need for those floors to combat the lack of bid density currently in the market doesn’t make much sense. I wish we could come up with a great solution on how to incentivize DSPs to submit that all healing 2nd bid. Maybe it’s as easy as agreeing that we can put an end to all this 1st price, dynamic floor talk if DSPs actually do it, but I’m guessing it might be a bit more complicated than that.

  2. James

    Dynamic pricing happens all the time around us in retail through club prices, coupons, cash back sites, credit card cash back bonuses, and even food stamps/welfare. You think you pay the same as the guy next to you in the supermarket line but in fact there is absolute price discrimination based on what each consumer is willing to pay.

    However, I do agree with your overall point that price transparency is what will be sustainable over the long term.

  3. Thanks for the response Josh. I believe this concern about a limited number of buyers is a temporary issue – and remember it only takes two to create an auction.The analogy with search is an excellent one. When search first launched, you would have made the same comment about lack of demand. However, by creating a fair set of rules, the buyers rapidly grew and by bidding fair value grew this market from nothing to more than $40Bn a year. I am claiming that display is just the same – if we create a fair and transparent set of rules then the display business is going to grow just like the search business over the coming decade. This will drive ever increasing competition for publisher inventory as more and more players (like us) discover how to use significant technology to create more value for their customers. I for one believe this is incredibly exciting for both publishers and advertiser.

  4. I can appreciate all these points, though I think there’s a faulty assumption that bidders bid their true value today. You only need look at what the prices are on today’s market. If the bids today represent true value, then all publishers are in huge trouble because the RTB clearing prices are absolutely abysmal and by the way so are the bid prices.

    Without price floors in place and some way of trying to move buyers closer to their true value, all publisher inventory, even premium publisher inventory would almost certainly clear at well below $1.00. Is that really what we think branded publisher inventory is worth? I realize some people are paying more, true – the Criteos of the world are among the highest paying customers out there, but they are effectively hand-selecting a very limited number of impressions, and I would guess that Criteo seeks to pay the absolute minimum amount for the inventory they need, not what’s it’s really worth to them. That’s not a criticism, it’s exactly what I would expect and want them to do if I were their client, but as a publisher, we’re all thinking, well why should the buyers extract all the value while I wait for RTB bid density to catch up with supply? Why should buyers expect publishers to act any differently than them and try to maximize their profit?

    Just because everyone doesn’t auction off their product on a strict second price system doesn’t mean the prices are unfair, and their isn’t a huge market at a controlled price. Nike doesn’t auction off their sneakers, Apple doesn’t auction iPhones, Ford doesn’t auction off their cars, so why should there be an expectation that publishers should submit their brands to the second price auction system to price their product?

  5. Good discussion here.  While I don’t believe that dynamic price floors are the answer, I definitely agree with josh that a true auction is not happening and publishers are looking for answers.   DSP internal auctions limit private marketplace competition to a point where most closing bids end up several cents above price floors.   That’s why publishers are calling for a first price auction or imposing dynamic price floors (which again, I do not support).  When  you look at bid data, many buyers are willing to pay $1,$2,$3 – in some cases $10 over our price floors to win important impressions.  But because of a lack of competition, we bump along at our near a price floor.   That’s not helping our business realize fair value for our premium impressions. 

    Jonathan, you mention that you believe this dsp internal auction issue is temporary.  That goes against all the feedback I have received.  I’d love to understand why you feel things are changing and when you anticipate this change to take place.  

    We (publishers,  ssps, dsps, trading desks and specialized buyers like criteo) are all sitting around talking about the future of RTB and we’re all acknowledging that traction is slower than anticipated.  So let’s all get in a room and figure out the issues.  I agree that we should establish fair running rules, build to that spec and make RTB successful.  The issue is that publishers and ssps have very little leverage to encourage change at the DSP level.  Buyers need to drive that discussion (with all parties in the room). From a premium publisher standpoint, things are still broken.  To support a second price auction, we need it to work.

    • Jeremy,
      These are great questions. I think this is for a whole new article, since this was intended as a response to publishers considering non second-price bidding mechanisms for RTB. RTB is about two things: automating the whole buying process online, and “auction pricing”.
      At Criteo, we believe absolutely in the value of programmatic buying, ie automating the process of buying individual impressions and cookies. However, this whole argument demonstrates the issues around relying on an auction to determine all prices. For sure, as a buyer I expect that if I commit to spend millions of dollars with a publisher on a guaranteed basis over the next year that I will be treated differently than if I just bid a few dollars on the “spot market”. Similarly many publishers will only allow certain advertisers with quality creatives to run on their site, and will think carefully about how programmatic buying impacts their direct salesforce.
      Therefore the display business is not going to suddenly just be determined by auction pricing.

      None of this changes the fact that where publishers are using RTB to determine prices, our view is that only a transparent auction with second price bidding + a floor price is going to lead to buyers bidding full value. Anything else is rapidly going to lead to a race to the bottom.
      And in a fair RTB auction today our experience is that if floor prices reflect market rates, our average CPMs end up well above those floors.