What is Bid Shading?

Bid shading is a technique used by demand-side platforms (DSPs) in AdTech to adjust winning bids. DSPs using bid shading will create an average between the lowest and highest bid on an impression to prevent advertisers from overpaying.

Bid shading is employed across different types of programmatic advertising auctions, but not every demand-side platform uses it. It’s one more tool publishers have available in their ad tech stacks.

In this article, we’ll discuss everything publishers need to know about bid shading and how it impacts their ability to generate revenue from their advertising inventory.

What is Bid Shading?

DSPs use bid shading as a way to provide better bidding strategies for advertisers, but can leave money on the table for publishers.

In programmatic advertising, there are two types of auctions: First-price and second-price.

The difference between first-price vs second-price auctions is that, in a first-price auction, the highest bidder secures the impression. In second-price auctions, the second-highest bidder sets the ultimate sales price. With bid shading, however, an algorithm creates an average between high and low bids to set the ultimate sales price as long as it’s higher than the second-place bid.

As algorithms help chose the best price for a first-price auction, it should benefit both the publishers and advertiser by helping determine market pricing for inventory.

First-Price Auctions

Since impressions are worth what someone is willing to pay for them, there’s always a concern from advertisers in first-price auctions that they are overpaying when with their bidding strategies. In a first-price auction, if an advertiser bids $10 and it’s the highest bid, they’ll pay $10 regardless of any other bids.

Publishers in first-price auctions can set a minimum bid price as benchmark to ensure a certain amount is made on the auction, offering inventory for real-time bidding (RTB) at a no-lower-than price. This assures publishers that winning bids meet the minimum threshold in their supply side platforms (SSPs).

Second-Price Auctions

Second price auctions are the most common type of auctions in programmatic advertising. These auctions allow advertisers to adapt the bid strategy in order to maximize their marketing budget and eliminate some of the concerns about overbidding.

If an advertiser wins the auction, they only have to pay one cent more than the second highest bidder. For example, it the highest bid in a second price auction is $10 and the second highest bid is $8, the buyer would end up paying $8.01.

The Bid Shading Compromise

Since first-price auctions would seem to favor publishers and produce higher rates, you may wonder why advertisers would want to participate in first-price auctions. The answer often lies in the quality of the ad inventory. If a buyer wants to reach a particular target customer, a first-price auction offers a better chance of reaching those users. In many cases, it’s advantageous for advertisers to spend more to secure the targets they want.

Still, in first-price auctions, buyers don’t know what their competitors are bidding. So, absent data and algorithms like bid shading, the trade-off is that buyers can wind up paying more than needed.

With bid shading, DSPs and SSPs can essentially reach a compromise in a first-price auction model.

Think of it the same way you might approach bidding on an item on eBay. You don’t want to pay $10 for an item you could have bought for $8. Advertisers don’t want to overpay either. To accommodate buyers, DSPs and SSPs agree on the final payout regardless of the winning bid price. The price is negotiated through algorithms to come up with a final price that lands somewhere between the first-price auction winning bid and the second-price auction winning bid. Instead of paying $10 (first-price auction) or $8.01 (second-price auction) in our examples, the buyer might wind up paying a blended rate of $9.

Research from PubMatic, Magnite, and The Trade Desk estimate that buyers save about 20% using bid shading. Similarly, bid shading is reducing publishers CPMs by about 20% as well.

Who Uses Bid Shading?

Not every DSP will offer bid shading, but some of the major platforms do, including:

  • Google’s DV360 
  • MediaMath 
  • Magnite (Formerly Rubicon Project and Telaria)
  • PubMatic 
  • Google Ad Manager

In 2019, Google was the first to use first-price auctions to offer more transparency to both sides of the deal. More and more publishers are leaning towards first-price auction to attract an optimal bid and make more money.  A bid shading algorithm will almost always recommend advertisers submit a lower price point in a bid auction.

While bid shading is a relatively new term adopted by ad exchanges and providers, there’s been some form of this practice going on since the early days of programmatic advertising. For example, Google Ads track historical data and provides recommended bidding levels. So do most other DSPs, whether they are using bid shading or not.

How Bid Shading Affects Publishers

Publishers offering their inventory in first-price auctions will generally see high bid prices and generate more revenue. Before bid shading became popular, publishers were benefiting from the auctions due to buyers often offering bids that were higher than what was needed to secure the inventory.

Since bid shading has become more frequently used, there has been a distinct decrease in publisher CPMs. However, with the right tools in place, publishers can control their pricing and yields. Publishers can set a floor price within their ad exchanges to ensure they are getting the minimum rates they need for their ad units.

When a floor price is set up, it automatically lowers the ceiling price based on bid shading algorithms, which is very similar to a second-price auction.

Advantages to Using Bid Shading

There are advantages for publishers to bid shading. It offers more control over the ad space for the advertiser, which in return stabilizes a publisher’s ad inventory. Algorithms in both the supply-side platforms and demand-side platforms can examine historical bid data based on available inventory and estimate an optimal bid price and winning price.

It can also evaluate the impact of bid pricing on win rate, providing the true value. Algorithms can determine the highest bidder for CPM, CPC, CPA, and other metrics so that bidder can optimize their bids.

Bid shading saves time from having to look back at previous auctions as the lower cost is calculated within the automation and provided upfront as part of the auction model. It gives advertisers confidence that they’re not overpaying for ad inventory.

Even though it may suppress some winning bid prices in first-place auctions, it’s not all bad news for publishers.  Even these averaged bids will be higher than second-price bids. In our example, an advertiser is still paying $9 using bid shading rather than the $8.01 a publisher would get in a second-price auction.

At the same time, publishers can maintain price control and manage yields by setting price floors, which maintain margins and help push bid shading prices slightly higher.

Disadvantages to Using Bid Shading

As you’d expect, there are also some disadvantages when bid shading is deployed.

While bid shading occurs on both DSPs and SSPs, SSPs allow the buyer more benefits than the publisher. Data analysis can predict outcomes based on historical data, so it can prevent advertisers from putting in bids that are higher than necessary to secure inventory. This avoids marketers from overpaying for inventory, but does reduce the amount publishers will get paid.

Proponents say bid shading helps establish a fair price for ad units, although the price may be lower than publishers would prefer.

Another disadvantage to bid shading for all parties is that there’s little transparency into the process. There is no easy way for buyers to assess attribution or how effectively their tech partner is bid shading.

Conclusion

In a transaction between advertiser and publisher, facilities by ad networks, ad exchanges, DSPs, and SSPs, everything happens in an instant. As ad calls go out, transactions happen in milliseconds to match ad units to bids. Header bidding allows publishers to get bids from multiple demand partners to get the highest possible bid. Bid shading helps advertisers find a negotiated rate based on an average of bids.

For publishers, bid shading can reduce the earning potential in first-price auctions, but almost always produces clearing prices that are higher than the winning bid in a second-price auction.

Newor Media works to provide publishers with the best possible experience and the highest possible profits. Reach out to learn more about how we can enhance your site monetization efforts!