4- But what is bid shading?
Following this move from 2nd to 1st price auctions, DSPs have begun a practice called bid shading to get the lowest winning bid price.
With bid shading, DSPs reduce their bid as much as possible to maximize their margin without impacting their win rate. To prevent them from this new practice and a CPM that's too low, advertisers have started to set floor rates.
This feature is now available in many DSPs and will become more popular due to the move from 2nd price to 1st price auctions.
How does it work? The DSP will analyze all the historical information logged on bids. It will then calculate the bid so that it sits between what the first and second bids would be.
These bid shading algorithms also take site, ad size, exchange, and competitive dynamics into consideration when determining where to set the bid. If win rates decrease, they'll raise the price they pay.
It's important to note that bid shading has some drawbacks, and some advertisers consider it a temporary "dirty" fix to use while they improve their knowledge about the best way to bid in a 1st price auction environment.
5- But does bid shading offer real transparency?
Important questions remain around the transparency of first-price auctions and bid shading. Google claims that first-price and unified auction will bring better transparency.
However, bid shading uses black box algorithms to lower bids. And even for buyers, these tools are not really transparent. DSPs don't disclose how much they might be benefiting from the margin they take from bid shading.
And as mentioned above, some advertisers might consider this a "dirty" fix, or temporary solution to use while they accelerate their learning curves on the subject.
6- Will Google's unified, first-price auction kill header bidding?
The underlying question is now that Google will allow all buyers to compete in a unified auction, what happens to header bidding?
In our opinion, header bidding will continue despite Google's unified first-price auction.
Header bidding allows a publisher to take back control over their inventory by managing both their revenues from Google and the fees in their wrappers.
Some publishers might be concerned that Google's unified first price auction mechanism will still provide an advantage to Google, and Google has yet to provide enough proof points to establish their transparency. And advertisers might think they won't have enough control. Lack of transparency will remain a big concern regarding Google's dynamic allocation and they will still continue to use header bidding.
In addition, it seems as though EBDA and header bidding are acting in a complementary fashion. (In some cases, if both mechanisms are plugged into the same placement, EBDA will fill an impression rather than header bidding.) Moreover, the CPMs are different, and some publishers have even seen revenue uplifts of +10%, so certain SSPs might recommend maintaining Client-side Header Bidding even if the inventory is available through Google Exchange.
All publishers agree that competition and bid density have a positive effect on eCPM, and this remains true even in a 1st price environment.
Higher Cookie sync matching rates is another strong argument to support client-side header bidding.
With this move to 1st price, the strategy should differ from that used in second price auctions. Publishers will have to make careful adjustments to their flooring strategies. At Smart, we help publishers protect themselves from bid shading and advise them to set a minimum floor price to guarantee to maintain a minimum value of their inventory.
