In recent years our industry has slowly shifted away from second-price auctions in favor of the reduced complexity offered by first-price auctions. The move to first-price auctions introduces a much needed level of transparency to the industry and allows buyers and sellers to arrive at a clearer value exchange.
To simplify auction dynamics across SpotX, we’re actively working to transition all of our media owners’ inventory to a first-price auction model by September 2020. Additionally, moving forward, new customers will be onboarded to the SpotX Platform with first-price as their default auction type.
Why is SpotX making first-price auctions the default auction type?
SpotX introduced support for first-price auctions in 2018 to help buyers increase win rate in header bidding scenarios, where it is advantageous for the buyer to submit its most competitive bid to have the best chance of winning the final ad server auction. Since introducing support, SpotX media owners have slowly adopted using a first-price auction model outside of header bidding scenarios, with first-price auctions now representing roughly 80% of SpotX auctions. This gradual transition to first-price auctions has allowed ample time for our DSP partners to adjust and prepare for the change.
In addition to the trends we’ve seen internally, it is clear that the use of first-price auctions is where the industry as a whole is headed. Other leading SSPs and ad servers have already made the switch to a first-price auction model. For example, both Google Ad Manager and Hulu’s invite-only programmatic marketplace transitioned to a first-price auction model in 2019.
With both first- and second-price auctions happening across the SpotX marketplace, buyers are required to manage different buying strategies for each auction type. Additionally, the overly inflated bids submitted into second-price auctions make it hard to identify the true value of inventory, and thus make it difficult for SpotX to offer buyers bid guidance. The move to standardize the use of first-price auctions will allow buyers to simplify bidding strategies and to have complete and transparent control over pricing, plus it will allow SpotX to offer buyers better bid guidance.
How should buyers adjust for the shift to first-price auctions?
In a first-price auction what you bid is what you’ll pay, so the most important thing is to never bid more than you are willing to pay. Beyond that, it’s important to utilize your DSP’s bid optimization tools to inform your bidding strategy. All major DSPs have optimization tools that help ensure you’re not overpaying in a first-price auction.
A common function of most DSP bid optimization tools is a concept called bid shading. Bid shading refers to the act of dynamically reducing the submitted bid price, with the goal of arriving at the lowest possible winning bid price. For example, a buyer might be willing to bid $20.00 in a second-price auction, but would prefer to bid 20% lower in a first-price auction. If the supply partner indicates in the bid request that the auction type is first-price, the DSP’s bid shading tool would dynamically reduce the bid price by 20%.
The technical details and algorithms used for bid optimization will vary by DSP. For example, Koa, a product of The Trade Desk, analyzes historical clearing prices across first-price auction environments to choose the optimal bid for each impression offering and Google Display and Video 360’s automated bidding feature considers auction type to help buyers tailor their bids for each auction. These are just two examples of bid optimization tools, but all DSPs have offerings to help inform your bidding strategy. We recommend you reach out to your DSP if you’re not already familiar with their bid optimization tools and capabilities.
To learn more about first-price auctions and the related impacts to auction dynamics, check out this guide designed to help buyers understand and optimize auction dynamics.