Bid shading is a method used by buyers in first-price auctions to avoid overspending, and its importance has grown as every major exchange has transitioned to a first-price auction.
Simply explained, it is a campaign feature that can help advertisers save money. Here’s an explanation of what it means and how it works.
Bid shading defined
There are two types of auctions in programmatic advertising: first-price and second-price. The highest bidder determines how much an impression is sold for in a first-price auction. The sale price of an impression is determined by the second-highest bidder in a second-price auction. Bid shading has emerged as a middle ground between the two. So, based on an estimate performed by the ad tech partner, the buyer will pay somewhere between the second-price and first-price value.
How it works
Because of the shift toward first-price auctions, the technology is mostly accessible as a free service on supply-side platforms and is becoming a feature increasingly used in DSPs. The vendor will study bid-history data, such as what bid rates normally win on a specific website or in a specific ad location, or at what price bids are lost, to determine what a bid should be that is midway between the first and second offers.
Bid shading was created as a way to please buyers who were unhappy with having to pay far higher prices than they were used to when first-price auctions became popular. However, it is not particularly transparent, so buyers must rely on whatever the seller claims is the correct pricing.
Is it beneficial to publishers?
Bid shading has some advantages and disadvantages from the standpoint of a publisher. So, first and foremost, the disadvantage for a publisher is that they will receive a slightly lower cost and revenue than they would if it were a direct first-price auction. So, if it was a straight first price, they’d earn $10, but if bid shading is used, they’ll get $9 or $9.20. So it’s a little less, which is a negative, but it’s still more than what they’d get in a second-price auction at $8.01.
The benefit to the publisher is that because you are offering some sort of discount and the DSPs are aware of it, you are more likely to have more DSPs competing in the auction. And there are DSPs that either has a first price bidding algorithm or don’t since they know they won’t have to pay the entire price that they have bid.
So that’s how bid shading works, as well as its benefits and drawbacks. We perceive it as only a band-aid or temporary remedy. The reason for this is that it is a step backward in terms of the first-price auction. It restores a lack of transparency to the auction process, whereas the first price tries to make it completely visible.
Another reason we regard it as a transitory solution is that if all of these DSPs want to compete in this business, they will eventually design their own first price algorithm. And, after all, DSPs are bidding using a first price algorithm, prices will begin to level out and DSPs will become more accustomed to paying those price points.