What is Bid Shading? Programmatic Definition Series

bid shading definition

If you work in Programmatic advertising, you have likely come across the term “Bid Shading” through conversations with your colleagues or at your local office cooler. If you don’t know what bid shading means, you will have a clear understanding by the end of this article. Here is the definition for Bid Shading and how it effects ad tech.

Bid shading simply put, is a term in AdTech used to describe auction mechanics, where a buyer of an ad impression in a second price auction bids lower than they intended in order to not overpay for the inventory. Bid shading algorithms are deployed during the bidding process by SSPs and DSPs to analyze factors such as the domain, size, geo and many other data points over time to determine a fair price to bid. If the buyer is finding they are not winning inventory at a low bid, the algorithm will increase the bid price over time until the sweet spot is met.

In a second price auction,
the winning bidder will only pay a penny more then what the second higher bidders
paid. Buyers of online ad impressions are savvy, buy through multiple exchanges
and employ tactics like bid shading when they understand the rules of the
programmatic auction through a particular exchange. Buyers have tight budgets
and specific KPI’s and cannot afford to overspend on an auction. AdExchanger has a great articles
that also explains bid shading worth checking out.

of A Second Price Auction

Still confused? Well you should be! Here is an example of what a standard second price auction looks like.

SSP A – Bids $4.56

SSP B – Bids $5.63

SSP C – Bids $10.12

Who is the winner in this auction. Well of course SSP C wins but they will only pay $5.64, a penny over what the highest bidder bid. Over time, SSP C’s bid shading algorithms should adjust the bid down over time to avoid overpaying for an impression as SSP B and C may increase their bids over time, making the impression more expensive. It’s an optimization game to maximize ROI.

While this may work out for the winning bidder as they saved a lot of money on the bid, the Publisher will make less over time with bid shading as buyers become smarter and pay less. In this style of auction mechanics, it leaves the door open for bid manipulation strategies where a buyer can bid through multiple exchanges (you can see where a publisher sells and resells their inventory through a simple ads.txt file). DSPs, SSPs and programmatic buyers in general are always trying to find ways to purchase more premium inventory at cheaper prices.

Buyer’s that are competing for the same piece of ad inventory, if they are advanced enough technologically, can study the bid trends for a certain piece of inventory, understand the different sources that house the supply, and implement strategies to force their competitors to pay more while they pay less. It’s a battlefield out there!

do we solve for Bid Shading? The First Price Auction.

Let’s look at the same
scenario but apply a first price auction.

SSP A – Bids $4.56

SSP B – Bids $5.63

SSP C – Bids $10.12

In a first price auction,
SSP C wins the impression and will pay their full bid of $10.12

First price auctions in
theory are great for publishers (sellers of inventory) as they receive the full
price that the buyer intended to pay. For the buyer, while they may have paid
more for the impression, the increased price gives them a better shot of
winning and they won’t lose money by submitting bids that don’t win, incurring
tech fees over time.

With Google Moving to a first price auction with AdX, the theory is that publishers may see an increase in Google’s win rate and a decrease from their other header bidding partners. This unified pricing within Ad Manager, should create a truly agnostic auction within the publisher ad server. According to AdExchanger, Google will be the last major exchange to move to first-price auctions. Google is a huge piece of the ad market and only time will tell how their shift to the first piece auction will effect header bidding win rates.

Heading bidding rose to prominence over the last few years and while it has significantly grown revenue for publishers, it has created a mountain of confusion for the buy side. Many publishers deploy 5-6 partners in their Prebid client-side wrapper and another 5-6 in their server-side wrappers (EBDA, A9 TAM) creating sometimes 12-20+ pipes to the same piece of inventory with the same DSPs bidding against themselves. What a mess! We will have to write another post that specifically maps out how header bidding effects DSPs.. stay tuned for that!