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Real Time Bidding: An Overview of Auction Types

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Every once in awhile, it’s good to go back over the basics.

While the great first-price auction vs. second-price auction debate rages on, we’d like to step back for an overview of the three types of auctions and talk a bit about “waterfalling.”

When brands engage in real time bidding (RTB) for online ad impressions, the three basic types of auctions are first-price auctions, second-price auctions and fixed or guaranteed auctions.

Before we get into the nuances of these types, let’s cover how an advertiser ends up at an RTB auction in the first place.

1. The RTB process starts when a user visits a webpage.
2. This triggers a bid request that sends data such as the user’s demographic information, browsing history, location, device type, IP address, the page being loaded and other information.
3. The bid request goes from the publisher to an ad exchange, which submits it and the accompanying data to multiple DSPs (advertisers).
4. Advertisers that have a matching ad send their bid response and are entered into the auction.
5. The auction takes place.
6. The impression goes to the highest bidder and their ad is served on the page.

All of this happens in 200 milliseconds.

Real time bidding process

Real time bidding: First-price auctions

In a first-price auction the highest bidder wins and pays the amount it bid (similar to a blind-silent auction). The auction is then cleared based on the highest price offered.

Say for example, L.L. Bean bids $2, North Face bids $3 and Lands’ End bids $4. The highest bid determines the winner (Congrats Lands’ End!). Four dollars wins the auction and $4 is also the price at which the auction is cleared.

In an open auction, first-price auctions run the risk of price inflation (not that publishers mind those higher CPMs). To be successful in a first-price auction, bidders need to make educated guesses about how much the competition will bid and then bid higher.

This potential for price inflation makes first-place auctions more suitable for private auctions, which are more low-demand and less crowded and competitive than open RTB auctions.

Real time bidding: Second-price auctions

A second-price auction is similar in that the highest bidder still wins, but it pays the second-highest bid plus a predetermined amount, usually one cent.

Second-price auctions are more suited for a competitive open auction because it allows buyers to bid on ad inventory aggressively without fear of overbidding because they know they will actually end up paying one cent more than the closest competitor’s bid.

Because the second-price auction is most commonly used in exchanges, let’s walk through an example of this type of auction.

second-price auction

Often in auctions the publisher will set a price floor, which is the minimum amount for which they’re willing to sell an impression. The DSPs are not aware of the price floor at the time of the auction. This means that only bids above the price floor will be considered.

So let’s say the publisher sets the price floor of $3.50.

  • The ad exchange sends out a bid request.
  • DSPs A, B and C send back bid responses. DSP A bids $4, DSP B bids $3.75 and DSP C bids $3.50
  • DSP A is the winner with the highest bid of $4.
  • However, since this is a second price auction, DSP A will pay the value of the next highest bid plus 1 cent. So the final cost to DSP A is $3.76 per 1000 impressions. Note that the bid value is per 1000 impressions so the actual cost of a single impression is the winning bid divided by 1000.
  • Real time bidding: Fixed CPM/guaranteed auctions

    Lastly, in a fixed CPM/guaranteed auction the bidder agrees to pay a pre-determined price or guaranteed budget for 100% of a specific type of impression, trumping all other bids.

    This type of auction is for brands that can afford to buy up ad inventory to guarantee their ads will run … first- and second-person auctions be damned. An example of this would be Marvel engaging in a fixed CPM/guaranteed auction during the month a blockbuster superhero movie is opening to guarantee those ads will get in front of users.

    Then there’s ‘waterfalling’

    This is all pretty straightforward, right? But what happens when multiple ad exchanges are involved, or if no one in an auction bids above the price floor? Glad you asked.

    To hedge their bets, publishers will sometimes tap multiple ad exchanges for buyers. This process happens in an organized fashion known as “waterfalling.” Waterfalling gets its name from the waterfall like process where auctions are initiated one at a time, one after another.

    waterfalling

    An exchange’s place within the waterfall is based on deals it has struck with the publisher. The waterfall sequence can change frequently.

    Let’s take a look at a few examples.

    In the image below, the first exchange is Google’s AdX, but there are two new exchanges, AppNexus and Rubicon. Note that the price floor for this auction is still $3.50. This means that only bids above the price floor will be considered in the auction.

    waterfalling

    The AdX auction process takes place, DSPs bid and the winning bid is $3.55. Since this winning bid clears the price floor, AdX wins the impression and the remaining exchanges in the waterfall do not get the opportunity to place bids.

    Now, what if the first exchange in the auction fails to meet the price floor? In the image below, the price floor has been raised to $3.75. The winning bid from the Adx auction of $3.55 will no longer clear the price floor. So we move on to the AppNexus bid.

    waterfalling

    The AppNexus process takes place, and the winning bid from that auction is $3.60. This also doesn’t clear the price floor and will not be accepted.

    Finally, we get to the Rubicon auction. The winning bid from that auction process is $3.80. Because this winning bid clears the price floor, Rubicon wins the impression.

    Nanigans thrives in a waterfall environment given we work with multiple ad exchanges. Having the most possible opportunities to enter auctions gives our customers the highest chance to win auctions and receive impressions.

    If you’re interested in seeing what’s possible with Nanigans, get in touch with us today.

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