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  • Writer's pictureRussell Vilardi

Everything You Need to Know About Programmatic Auction Dynamics

Small blue data cubes representing a publisher ad stack.

Online ad space used to be sold the same as old-school print advertising, at a set price direct from publishers. That’s changed, however, as the online world and streaming video has shifted to programmatic advertising.

Programmatic advertising is all about selling ad space via real-time auctions. To get the most value from your available ad time, you need to know all about programmatic auction dynamics, including the different types of auctions, when to use each, and which is best for your service and content. It’s not as easy as selling a display ad in a print publication, but it promises to be more profitable.

Key Takeaways

  • Programmatic ad auctions let advertisers bid on available ad inventory

  • Header bidding has supplanted the traditional waterfall approach

  • Dynamic auctions are more common than fixed-price bidding

  • First-price bidding is gaining ground on second-price bidding

What is Programmatic Advertising?

Programmatic advertising uses artificial intelligence and other cutting-edge technologies to automate the process of selling and buying advertising. Publishers, such as streaming video services, offer ad blocks to advertisers, who then bid on that ad time. The bidding process is automated and takes place in real time.

Because of the growth of advertising-supported video-on-demand (AVOD) services, such as Pluto TV and The Roku Channel, programmatic advertising is growing rapidly. According to eMarketer's U.S. Programmatic Video 2022 report, programmatic ad spending for AVOD services increased by 82.4% from 2020 to 2021. Programmatic streaming video ads now reach 72% of U.S. households, which represents a huge opportunity for both advertisers and publishers.

Making programmatic advertising normal in TV.

How Do Programmatic Ad Auctions Work?

Programmatic ads are sold via real-time auctions. Instead of publishers selling space directly to advertisers, programmatic advertising uses a series of middleware services called supply-side platforms (SSPs) and demand-side platforms (DSPs) to automate the buying and selling process. Publishers use SSPs to sell their ad space, and advertisers use DSPs to select the right programming for their ads. The SSPs and DSPs communicate with each other to ensure that publishers get the highest possible bids and advertisers get the most targeted exposure for their ads.

A publisher (streaming video service) notifies one or more SSPs of available ad inventory for a given program. Along with basic availability, the publisher also conveys information about the program’s content, what types of viewers are watching, and information about those viewers.

Similarly, an advertiser notifies one or more DSPs of the ads it wants to run, along with preferences as to what types of consumers it wants to reach, what types of programming are desirable or unacceptable, and how much it’s willing to pay.

The SSPs and DSPs exchange the necessary information to place the right advertisers with the right programming. The DSP then bids on the chosen ad space, notifying the SSP how much the advertiser is willing to bid. The SSP chooses the highest bidder for a given ad block, and that advertiser’s ads are then automatically inserted into the publisher’s programming (through the DSP and the SSP).

It’s all fully automated and takes place in real-time. There are, however, different ways that this process works, which is where auction dynamics enter the picture.

What Are Today’s Programmatic Auction Dynamics?

Different publishers, DSPs, and SSPs run their programmatic auctions in different ways. Approaches that were common just a few years ago are falling out of favor as new technologies gain favor, all promising to either maximize publisher revenues or optimize advertiser spending, or sometimes both. Depending on the dynamics of a given programmatic auction, different winners can emerge, which can then affect advertisers’ bidding strategies.

Waterfall vs. Header Bidding

Ad space has traditionally been sold via what the industry calls the waterfall method. In this approach, ad space is offered to one client after another sequentially, like water going over a waterfall. In a waterfall auction, ad space is first offered to a priority advertiser or ad network. If this client doesn’t take the space, it’s then offered to the next advertiser or network in line. If they don’t take the space, it goes to the next priority advertiser, and so on until the space is filled.

The waterfall approach has several drawbacks:

  • Seldom optimizes ad revenue for publishers because the first buyer might not be willing to pay the highest price

  • Can’t operate in real-time because it moves sequentially from one client to the next

  • Doesn’t ensure advertisers’ placement in highly desired ad blocks because priority clients get preferred placement

Because of these drawbacks, the waterfall approach is being supplanted by header bidding auctions. Unlike the waterfall method, header bidding is automated. Publishers offer their ad inventory to multiple ad exchanges or SSPs, which in turn allow multiple DSPs to bid on that space.

Header bidding lets publishers maximize revenue by accepting the highest bids, no matter where an advertiser might be in the queue. It also lets advertisers get better access to the content they want if they’re willing to pay for it. Because of this, header bidding is the most common approach in programmatic advertising today.

Fixed vs. Dynamic Bidding

Fixed-price auctions let advertisers submit fixed bids for their ads. The advertiser offers a set bid price that the publisher either accepts or rejects.

Dynamic auctions let advertisers specify a bid range, from which the final bid is submitted dynamically. If there’s competition for a given ad space, the bidding apparatus bids a higher price on behalf of the advertiser. If there’s less competition for the space, the advertiser can automatically offer a lower bid.

Fixed-price auctions have fallen out of favor because they’re relatively inflexible. Advertisers end up either paying more than they have to if there’s little competition or they lose the auction because they can’t bid higher when necessary.

Publishers might prefer a fixed-price auction if they’ve already negotiated a price with a buyer, as might happen in a private ad marketplace. However, it doesn’t let the publisher benefit from competition for more popular content or more limited ad space.

Second-Price vs. First-Price Bidding

Second-price auctions are more traditional in that the high bidder only has to pay what the second-highest bidder has bid – or, in some instances, just a small amount more. Imagine two bidders, one placing a maximum bid of $10 and the other a maximum bid of $12. The second bidder wins this auction, but with second-price bidding, they only have to pay $10, not the full value of their $12 maximum bid.

A second-price auction.

In a first-price auction, the high bidder still wins but has to pay the full value of their maximum bid. Using the previous example, the $12 bidder still wins but now has to pay the full $12.

A first-price auction.

Publishers typically prefer first-price auctions as they generate more revenue. Advertisers typically prefer traditional second-price auctions, as it allows them to set a high maximum bid to win contentious auctions but doesn’t commit them to paying that full bid price in less-competitive situations.

The trend, however, is toward first-price bidding. Some believe that this type of auction increases transparency and simplifies planning, as advertisers know up front exactly what they’re paying. It’s a matter of “you pay what you bid,” with no more hidden maximum bids.

Optimize Your Programmatic Advertising Revenues

No matter which auction dynamics are in play, publishers can maximize their programmatic ad revenues by optimizing their ad inventories. With video-on-demand solutions that enable real-time ad decisioning, publishers can increase fill rates, and advertisers can reach more targeted audiences automatically.

Contact Penthera today to learn more about programmatic auction dynamics.


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