4 Ways Programmatic Buyers Can Master First-Price Auctions

Following Google’s recent decision, which shook up the market

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The months ahead will demand greater attention from traders in updating their bidding strategies and mapping out the new first-price supply chain.
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In 2019, key players in the complex world of programmatic have taken major strides toward greater simplicity and transparency for buyers. In fact, Google’s recent decision to adopt a first-price model has added pressure to programmatic traders to simplify the state of auction dynamics and shed the inefficiencies of second-price auctions.

For years, second-price auctions left money on the table for supply-side platforms (SSPs) and media owners, encouraging inflated bid prices since winners only paid the price of the second-highest bidder. Knowing they would never pay the actual amount, buyers traditionally placed high bids leading to a market distortion that made it difficult to assess the true value of inventory.

However, as the industry moves toward first-price auctions, buyers can capitalize on the transition by revamping their bidding strategies while forging closer relationships with their SSPs and leading to a more transparent supply chain.

Educate traders on auction dynamics 

The switch to first-price auctions caught many buyers off guard. Since it is still a relatively new concept to the buy-side, knowledge gaps could lead to suboptimal bids and sunk costs, with buyers overpaying for inventory or losing important auctions where the rules have changed. Therefore, as auction dynamics continue to evolve, it will be important for SSPs to work with demand-side platform (DSP) partners to ensure that all parties are educated on the various auction options and tailor programmatic strategies to fit their goals.

While many SSPs have already made the jump, the industry is still far from having one unified system.

Reassess your max-bid strategy

While effective, industry players are calling for a level of transparency that second-price models are unable to meet. However, with greater adoption of first-price auctions, industry players throughout the supply chain will begin to have a better understanding of the true value of each impression. Buyers will have an additional layer of transparency since it holds sellers accountable for charging the agreed upon price, emphasizing the concept “you pay what you bid.”

As a result, buyers will need to reassess bidding strategies and consider which metrics are important (i.e., content category, viewability, etc.), along with what price actually represents the highest they are willing to bid on any given impression opportunity. During this reassessment, buyers should continually monitor their win rates for fluctuations, ensuring that they are not losing auctions they had been winning before.

Enhance communication with the supply-side partners

As buyers transition to first-price auctions, it is crucial that they maintain a close relationship with supply-side partners. While many SSPs have already made the jump, the industry is still far from having one unified system. With that in mind, buyers should connect with SSPs to confirm plans around switching to first-price auctions. This is especially critical for buyers that work with multiple SSPs, as understanding the composition of first- versus second-price inventory for each partner is different.

However, collaboration between SSPs and DSPs does not simply end once a first-price method has been adopted. There are still other facets that need to be taken into account, including troubleshooting and optimization. For example, if a DSP’s max-bid strategy reflects true value and they are still not winning, they may need to adjust their overall inventory mix. SSPs can help identify quality sources they may have overlooked. Also, if there are specific performance or financial targets a buyer needs to meet, working closely with SSPs on building out relevant private marketplace (PMP) deals could offer greater efficiencies rather than the open marketplace.

Work with DSPs on new reporting tools

The onus should not only fall on buyers. SSPs need to coordinate with their DSP partners to determine which reporting tools or algorithms could provide greater transparency into auction dynamics. Ideal solutions will not only locate the optimal bid price for each impression but also ensure they are only bidding on the right impressions in the first place (as determined by brand needs, audience composition, campaign goals, etc.). After all, the industry can only capitalize on the transparency gains from first-price auctions if they have up-to-date, granular analytics from their demand partners.

The months ahead will demand greater attention from traders in updating their bidding strategies and mapping out the new first-price supply chain. But by next year, their campaigns—and the broader ad-tech ecosystem—will benefit from more stable prices, greater auction transparency and higher yields for media owners.

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