Back to life, back to transparency: why the 2nd price auction might be on its way out
As a result of the rising competition with header bidding and the changes in behaviour by SSPs (supply-side platforms), for the first time, the display advertising industry needs first-price auctions.
If you’re looking to adopt a first-price bidding strategy, there are certainly benefits to both buy-side and sell-side auction models. Commercials and cost benefits certainly play a part in this process, but transparency is ultimately the most important factor. First-price bidding has the potential to benefit the entire ecosystem by forcing buyers to bid more accurately and effectively, moving forwards.
This means big changes are coming to auctions, as exchanges roll the dice on first-price bidding.
From second-price auctions to first-price bids
Historically, if you’re bidding on a second-price auction, you will only ever be required to pay a penny more. For instance, if your competitor bids £3, and you bid £5, your bid will clear at £3.01.
With a first-price buying mechanism, you bid £5 and still pay £5. To a certain extent, we should be in favour of first-price bidding, as it’s hard to determine whether a fair second-price auction truly exists anymore…
A lot of DSPs have been telling SSPs to clean up their act or else they’ll be cut off. Traders are also changing the bidding processes to achieve greater visibility. For many years, agencies and brands alike have had to accept the relatively ‘black box’ approach in the industry.
No one has been able to confidently say that they know exactly how much of their budget has definitively been spent on pure media, or had visibility on the ‘true’ CPM of their bought inventory. Through more education and exposure, buyers and agencies have become savvier, so manipulating an auction dynamic to what’s been rather opaque to date, should now become a thing of the past.
Preparing for the change
This change in bidding method will allow us to start over. Admittedly, we’ve been in need of a clean slate – there’s a need to remove all the confusion and clutter caused by a fragmented and saturated tech landscape.
It means that buyers need to make smarter decisions by identifying and targeting users that are more valuable to them. Further, this will allow buyers to have a better understanding of how much they should be bidding for their target audience, off the back of this, and therefore have greater control over their costs.
Ideally, if second-price bidding could offer better transparency, then we wouldn’t have to go down this route. So, we should welcome this change since everyone in the industry has been achingly striving towards more transparency in their buying methodology.
But, unfortunately, the downside of this, is that this will come at a greater cost. Gone are the days where programmatic activity offered us an avenue to cheap remnant inventory (in bulk). Time will tell whether publishers will still be able to shift this inventory (at a fair cost).
How we can utilise AI and programmatic
There is so much more to programmatic these days – it’s ever-evolving. We can now access video, native and even audio inventory through a single DSP. Whilst this is great for us, we need to be cautious of what may be blended into our costs within the pipes. Unfortunately, despite that, client budgets aren’t going to increase just because the price of the auction is going up.
What raises concern is that one could end up overpaying for inventory, which, of course, wouldn’t be great for anyone buying it. Whilst first-price bidding takes some of the opportunity away from us (in terms of the scale around cheaper inventory), in the long run, it’s going to work in our favour. We know how to tackle this and drive value by utilising different bidding methods and having a hybrid of buying tactics (which is, of course, dependent on the creative format and the campaign’s objectives).
Agencies and brands alike need to think more strategically about how they’re going to allocate budget, in order to keep getting clients the best possible results. While algorithms and artificial intelligence play a big part, human intervention, experience, intuition and instinct, remains key in the optimisation process.
Without man to keep the machine on track, and working fast and effectively enough, results suffer. People driving these platforms and systems remain pivotal.