Bid Shading Defined
Understanding Bid Shading in Ad Tech
Bid shading is a technique used in programmatic advertising to adjust winning bids, especially with the shift to first-price auctions. In a first-price auction, the highest bidder pays their bid amount, unlike a second-price auction where they pay slightly more than the next highest bid. Bid shading is a compromise where the winning bidder pays an amount between what they would have paid in a first-price and second-price auction.
How Bid Shading Works
The Mechanics of Bid Shading Algorithms
Demand-side platforms (DSPs) and some supply-side platforms (SSPs) employ bid shading to benefit media buyers. These platforms analyze historical bid data, such as win rates, ad unit sizes, and bidding history, to predict the lowest possible winning bid. By examining past winning bids and market data, bid shading algorithms aim to prevent advertisers from overpaying for ad space.
The Shift to First-Price Auctions
Bid Shading’s Emergence in Programmatic Advertising
Bid shading became more common as programmatic advertising shifted towards first-price auctions. Before bid shading, advertisers were often uncertain whether they were participating in first or second-price auctions. DSPs introduced bid shading to estimate what a winning bid would have been in a second-price auction, allowing them to bid competitively without increasing costs.
Benefits for Media Buyers
Gaining Efficient CPMs Through Bid Shading
By using bid shading, media buyers can achieve more efficient CPMs (cost per mille). This optimization tactic helps advertisers avoid overspending on impressions by forecasting a winning bid that is lower than their default bid. Activating bid shading allows media buyers to balance cost-cutting with maximizing delivery.
Impact on Publishers
Bid Shading and Publisher Revenue
While bid shading provides better bidding strategies for advertisers, it can potentially reduce revenue for publishers. Ad networks or buyers may temporarily lower their bids on publisher inventory to secure better deals, which could leave money on the table for publishers. Publishers need to understand bid shading to manage its impact on their advertising revenue.