Monetization - 5 min read  - November 28, 2019

The Future of Programmatic: Why Switch to First-Price Auction?

Turning to a first-price auction is perhaps one of the most important steps towards making programmatic auctions transparent for buying and selling.

UPDATED POST. After rolling out the first-price auction model earlier this year, we noticed a positive effect. Scroll down to see the results.

The industry is confidently moving towards first-price auctions and fair bidding. As an advocate for transparency in the ad tech market, we at Stack encourage for the adoption of the first-price auction model as the preferred process for ad monetization than second-price auction. It is refreshing to see today more and more market players (AppNexus, OpenX, Google AdX) making steps to simplify programmatic and we invite partners to make that vital change.

Our programmatic ad exchange, BidMachine (a part of our Stack solutions), directly connects publishers with over 40 DSPs and demand sources. BidMachine encourages its partners to switch to first price auction in cases where they haven’t already done so.

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Second-price auctions leave money on the table

The main difference between first-price and second-price auctions is in the way the bids are finalized. With the second-price model, the bids are visible so that a buyer can add $0.01 to the second highest bid and win an auction.

For example, in this second-price auction below, the SSP exchange sends a low winning bid of $2.01, even though a higher bid of $7 was offered, which increases the risk of it losing to more realistic bids outside of the exchange.

In the first-price auction, all participants send their bids simultaneously and don’t see what other bidders offer. The highest bid wins and the price doesn’t change, i.e. the advertiser pays exactly what they bid in an auction.

For example, in the first price auction below, the SSP exchange sends through the highest bid ($7) and has the best chance of winning against bids from ad networks.

Essentially, by running a first-price auction both sides — publishers and advertisers — have the best chance of getting the deal that’s fair. Advertisers get access to quality inventory that makes the price they pay for it worth it, while publishers get paid adequately, and none of them have to participate in workaround schemes.

Why switch to first-price auction?

Even though first- and second-price auctions have been existing side by side in the programmatic ad buying space for quite some time, it is safe to say that the first-price auction is a more predictable and secure way of bidding.

The real bids win without being compromised. The rise of in-app header bidding emphasizes the need to allow as many bidders as possible to access a quality inventory. In fact, header bidding is one of the reasons premium ad traffic finally became available to many as opposed to being obscured in lower positions in the waterfall.

Often second-price auction makes it difficult to consider all available inventory and bid fairly. It keeps bidders in the dark for the benefit of ad demand partners and puts publishers at a disadvantage. Moreover, it forces bidders to come up with workaround tactics to parody the first price-auction and create smokescreens.

Second-price auctions are also inundated with hidden fees and manipulation to match closer to the first price-auction clearing numbers. For example, a $10 CPM bid may close at $9.99 or $9.60.

First price auction removes unnecessary obstacles and provides transparency that the ad tech market longs for, since the first-price auction obligates the winner to pay the exact price that was originally offered in the auction.

First-price auction impact

After switching to the first-price model earlier this year, we at BidMachine were able to see the positive changes that occurred among publishers and advertisers. According to our internal data, publishers who participated in the first-price auctions, increased their revenue by 9%. In the comparison chart below you can see two groups of publishers: the group A began participating in the first-price auctions in April 2019 when BidMachine rolled it out, while the group B continued with more conventional second-price auction. The groups started with comparable revenue growth numbers, but group A went ahead after engaging in first-price auctions. To put it in perspective, these results are based on 200 million ad impressions. 

Even though these results are quite modest, we see a real potential for fairer auction outcomes. Moreover, first-price auctions reinforce transparency in competing for ad impressions—it has beсome noticeable and feels refreshing. Advertisers are paying the appropriate prices for the right inventory—it’s a win-win situation. More global impact of the first-price auction is only possible if more advertisers and DSPs join, and thus augment trust that plays a vital role in successful auction outcomes. It is now accompanied by app-ads.txt and sellers.json that make the ad buying process clear and simple. Advertisers are now more confident to make buying decisions, while publishers make the most out of their inventories. 

Turning to a first-price auction is, perhaps, one of the most important steps towards making programmatic auctions transparent for buying and selling. In a transparent first-price auction, advertisers can finally clearly see the rules of the game and adapt to them, while publishers can move away from situations where consistently low bids in second-price auctions lead to loss of valuable impressions and negatively affect their revenue.

We recognize the opportunity to make the shift and get closer to the bidding process that is equally beneficial for advertisers and publishers. The more partners switch to the first price auction in the near future, the more efficient and transparent the programmatic industry becomes. It is refreshing to see more DSP partners embarking on the journey towards more transparent programmatic ad buying process and higher win rates.

Dmitry Usakov, Head of Programmatic at BidMachine

Make sure to speak to us if you’re interested in transparent programmatic earnings or connecting to BidMachine as a partner. To learn more about the benefits of ad exchanges versus ad networks, read this article

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