Mastering Ad Auctions in 2024: The Ultimate Guide for Advertisers and Retailers

Introduction to Ad Serving: What and Why?

Navigating ad auctions and selecting the right method are essential for marketplaces and retailers aiming to build a thriving ad business. With numerous options available, determining the most suitable ad auction strategy can be challenging. This guide will outline different auction methods, compare first-price and second-price auctions, and discuss their optimal use cases.

Ad auctions determine the cost and placement of digital ads on networks. Each auction is designed to maximize revenue by selecting the ad most likely to generate the highest payout, similar to real-world auctions.

Step-by-Step Ad Auctions

1. Platform/Placement Selection: Choose where ads will be displayed.
2. Budget Setting: Advertisers decide their daily or monthly spending limits.
3. Keyword/Audience Selection: Advertisers define criteria to target specific audiences.
4. Bidding: Advertisers place their maximum bids.
5. Monitoring & Adjusting: Advertisers review performance metrics to refine their strategies.

What Are the Different Ad Auction Types?

There are two main kinds of ad auctions: first-price and second-price. Let’s explore each and compare.

First-Price Auctions

A first-price auction model is relatively straightforward: what you bid is what you pay. For example, imagine three advertisers bid A: $1.00, B: $2.00, and C: $3.00 respectively. In this cas, Advertiser C wins the bid, meaning the advertiser will then pay $3.00.

Historically, first-price auctions have not been widely used across ad tech, but they have become increasingly popular in recent years.

Advertisers use first-price auctions because they:

• Offer Greater Revenue Potential: You make what the advertiser bids, even if the next highest bid was substantially lower.
• Have Become More Popular: Google, for instance, migrated to a first-price auction model in 2021, upending the long-held industry norm of using second-price auctions in programmatic advertising.
• Work Better with Header Bidding: As ClearCode puts it, first-price auctions “give buyers a better chance at winning the impression when header bidding is conducted, because instead of the winning bid from a second-price auction being pushed to the ad server, their true bid is the one that competes in the final auction.”

Second-Price Auctions

The second-price auction is an auction model that makes it easy and safe for advertisers to bid. Instead of paying the maximum amount for an ad space (as they would in a first-price auction), advertisers pay bids higher than the next highest bid to win the auction. This gives advertisers the confidence to submit their best bids without risking overpaying for a space.

In other words, in second price auctions, advertisers bid as much money as they feel is necessary to win the auction and they are guaranteed to never overpay. Essentially, there's less risk for the advertiser. With second-price auctions, the final price paid by the highest bidder isn't the top price. Instead, they pay slightly higher than the second price.

Let's walk through an auction with the following bids to better understand how second price auctions work. Bidder A: $0.10 Bidder B: $0.35 Bidder C: $1.00

In a first-price auction, Bidder C would win the auction (obviously) and pay $1.00 even though the next highest bid was way lower. In a second-price auction, Bidder C would win the auction and only pay $0.36 per click, slightly higher than $0.35 instead of $1.00

Quality second-price auction models used by Google Ads, Amazon Ads, and Walmart Connect also factor in relevancy in addition to bid amounts. When “laundry detergent" is searched for, relevant products like "Tide" are more likely to win the auction and be displayed rather than Bounce® dryer sheets that were bid on the same term. Even if the dryer sheet brand had the highest bid, the more relevant products will win the auction.

Advertisers use second-price auctions because they:

• Easy and safe for advertisers to bid: Advertisers can decide how much they value each click (for instance, they can take their conversion rate into consideration by looking at what fraction of the clicks results in a purchase and multiplying that by the profit they make from each sale), and simply bid their value. Because the price the winner pays is generally lower than their bid (and often substantially so), this strategy ensures that overall their campaigns will be profitable.
• ‍Overall outcomes of auctions are efficient: Bidders with the highest overall values (taking into account both how much they value each click, and how many clicks they expect to receive) will be shown in the most prominent slots on the page, while bidders with lower overall values will not be displayed as prominently - but will still receive some eyeballs and clicks. And, all bidders pay less than they initially bid.
• ‍ Ad auctions uncover the true value of your inventory: Second-price auction models have sufficient flexibility to adjust to changing market conditions, and most importantly, adjust to reveal the true market value of your ad space, which may be much higher than you think.
• ‍Pricing ad space is automated and simplified for advertisers: GSP auctions automate the process of pricing ad slots for advertisers. Each advertiser is comfortable with their bid because they know that they will only be charged an amount necessary to achieve their ranking.
• Historically, Are More Common: Advertisers are accustomed to second-price platforms, but as noted above, this trend has been changing in recent years.

Other types of auctions…

A) Waterfall Auctions: Waterfall auctions, also known as daisy-chaining, involve sequentially offering inventory to ad networks in a predetermined order. If the first network doesn’t fill the impression, it’s passed to the next, and so on.‍

B) Lottery Selection: In lottery selection (even rotation), ads are randomly chosen from eligible candidates, regardless of their bid amounts. This method is often used for even distribution across ads.

When to Use Each Method:

• First-Price Auctions: Best when you have high demand, as it maximizes revenue by having bidders pay their true bid.
• Second-Price Auctions: Preferred by advertisers for its fairness and efficiency, avoiding overpayment.
• Waterfall Auctions: Suitable for environments where inventory often goes unsold; it ensures maximum fill rates.
• Lottery Selection: Ideal for scenarios needing equal distribution and when exact bid amounts are less critical.

Considerations for Each Type:

• First-Price Auctions: Potentially higher revenue but can lead to overpayment and strategic bidding (bid shading).
• Second-Price Auctions: Promotes honest bidding and generally preferred by advertisers.
• Waterfall Auctions: Simple to implement but less efficient and can miss out on higher bids from lower-priority networks.
• Lottery Selection: Ensures fairness but doesn’t optimize for revenue maximization.

By understanding these different auction types, you can better determine which method aligns with your advertising goals and inventory management strategies.

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What Are Different Ad Auction Strategies?

Whether you want to do first- or second-price auctions, utilizing auction logic for selecting a winning advertiser can get tricky based on your pricing model. 

1. CPM (Cost Per Mille)

• Definition: Advertisers pay per thousand impressions.
• Usage: Best for advertisers with consistent traffic and a good understanding of their monthly impression numbers.
• Advantage: Ensures steady revenue as it is based on impressions.

2. CPC (Cost Per Click)

• Definition: Advertisers pay per click on their ads.
• Usage: Ideal for performance-focused advertisers.
• Advantage: Advertisers pay only when their ad is engaged with, making it efficient for direct response campaigns.
• Challenge: Riskier for advertisers as it depends on click-through rates (CTRs).

3. CPA (Cost Per Action)

• Definition: Advertisers pay when a specific action (like a purchase or sign-up) is completed.
• Usage: Best for direct response campaigns where conversion tracking is critical.
• Advantage: Ensures advertisers pay only for actual results.
• Challenge: Very risky for advertisers due to dependency on conversion rates.

Advanced Strategies

1. eCPM Optimization

• Definition: Combines various metrics (CPC, CPA) to calculate an effective cost per thousand impressions.
• Usage: Balances different bidding models to maximize revenue.
• Advantage: Provides a holistic view of ad performance.

2. Autobid

• Definition: Automated bidding system that adjusts bids based on predefined goals and real-time data.
• Usage: Ideal for advertisers looking to optimize their ad spend dynamically.
• Advantage: Saves time and ensures optimal bids using machine learning and AI algorithms.

Understanding these strategies helps in selecting the right approach for different advertising goals, ensuring optimal performance and revenue maximization.

Topsort’s Auto-bidding Technology

With Topsort’s Auto-bidding feature, for example, advertisers only need to input their desired return on ad spend (ROAS) goal and maximum CPC bid. Topsort’s advanced ad decision engine handles the rest by automatically adjusting the CPC bid to optimize toward achieving the target ROAS goal.

Key benefits of Auto-bidding include:

• Better Efficiency: Autobidding saves time and effort by automating bid adjustments, meaning less risk for advertisers of spending too much or too little.
• Better Performance: Using historical data and predictive analytics, autobidding optimizes ad spend by calculating the most precise bid for each scenario.
• More Flexibility: Auto-bidding lets you automatically adjust to market dynamics, while still managing multiple objectives and campaigns.

How Do Different Advertisers Run Auctions?

Topsort: Topsort specializes in AI for auction tools and New Age Infrastructure APIs, leveraging technology that tech giants use. Topsort's algorithms optimize ad delivery, ensuring relevant ads reach users. Advertisers compete with bids and product info to win impressions, with auctions initiated via API submissions. Topsort supports both manual and auto-bidding features, making it easy for products to compete for visibility based on bids and relevance factors.

Criteo: Criteo runs Open Auction campaigns through first-price auctions on a CPC model. Advertisers can choose the bid they’re willing to pay every time a shopper engages with their ad and take part in the inventory auction to win the placement.

GAM: Google Ad Manager runs Open Bidding via a “server-to-server” integration between advertisers  and their partners. Once an ad request is generated, Ad Manager runs a unified auction to determine an appropriate yield, enabling third-party demand partners to compete for inventory in real-time.

Moloco: Moloco runs auctions driven by various ML techniques, which leverage event data provided by their advertisers. This technique allows them to build lookalike targeting models that show advertisements to other mobile app users in similar existing user bases as the advertiser’s target audience.

CitrusAd: CitrusAd itself is an auction-based ad platform which allows advertisers to create advertising campaigns that are displayed on each retailer's e-commerce website. Advertisers bid to promote their products at the top of a retailer's website, and can track the performance of their products in real time.

Kevel: Kevel offers auction logic out-of-the-box through their ad infrastructure APIs, providing flexibility in auction strategies. Publishers can choose between first-price and second-price auctions and set rules for different auction methods like lottery or even rotation. Kevel's infrastructure also supports eCPM optimization. 

What Ad Units Work Best with Auctions?

The ad units that work best with auctions are typically those with a high number of sellers, allowing for competitive bidding that can drive up prices. Auctions are not well-suited for high-dollar inventory, like carousel ads. Let’s take a look at some ad units that work well with auctions.

Native Ads: This ads are seamlessly integrated into your feed, homepage, search results, and more. Often, these native ads look identical to your standard content, expect with an added “sponsored” or “promoted” tag. Native advertising was a nearly $100B market in 2023 and is an innovative, engaging alternative to standard banner ads.

• Sponsored Listings: Sponsored listings, also called promoted listings or sponsored ads, are organic listings that are promoted or highlighted in some way, usually located at the top of search results. They are an innovative way to drive revenue from advertisers seeking more visibility, without having a detrimental impact on sales or user experience.
• Banner Ads: Banner ads are ads displayed on a publisher’s site in rectangular formats known as “banners.” This kind of display advertising can capture users’ attention and drive traffic to a brand’s site or help generate overall awareness.
• Sponsored Brands: Sponsored brands effectively bridge the gap between more traditional Sponsored Listings and Banner Ads, ensuring that your brand and products capture the attention of shoppers at the same time.

Luckily in Topsort we have all of these formats! Click here to know more about our Retail Media offerings.

How Do I Get Started?

If you want to build auction functionality yourself, we recommend working with a data scientist to develop the algorithm needed for more complex auction decisioning. Your tech team would then need to incorporate this logic into your ad selection engine. Of course, that path could take months and countless engineering hours. It takes time to customize auction logic and ensure it’s up-to-date with current tech innovations.

That’s why companies like Poshmark, Cencosud and Garmentory are increasingly turning to Topsort to easily incorporate auction logic into their in-house ad platforms. To learn more about how to do it too, contact us today.

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