Ad vendors responded to the shift from second-price to first-price bidding by introducing bid shading. The rationale was that this strategy would save buyers money while maximizing the return on their advertising budget. However, bid shading continues to confound both advertisers and publishers who cannot figure out its role and the value it adds to the process of buying programmatic ads. This post seeks to clarify some of the misconceptions about bid shading.
Bid shading is an old technique
Bid shading is as old as advertising as buyers have always sought to extract maximum value from their marketing budgets. It is just that it has been remodeled to suit the needs of demand-side platforms (DSPs). Indeed, the use of historical data to generate a bid price that exceeds the second price was the norm, but it would go by other names such as bid modification. It was used by supply-side platforms (SSPs) for sometime before fading out only to resurface under a different name in the wake of first-price auctions.
DSPs view bid shading as a business opportunity because they can use it to charge buyers for helping them get a competitive bid in the first price system. Matthew McIntyre, who manages programmatic advertising at Essence, notes that the shading algorithms existed in the era of second-price bidding where they helped to derive a hybrid price. He opines that DSPs sell it as a new invention to extract a fee from their clients.
Bid shading will not diminish publisher margins
Publishers were excited by the shift to first-price auctions, anticipating a rise in advertising fees but the prospects of bid shading tempered their excitement. The frustration is understandable considering that DSPs sold it as a means of moderating price surges in the first-price auction. Publishers were concerned that the new intermediaries would take the power that was previously held by SSPs in valuing advertising inventory. However, given that the tool has been on the market for a long time, it is unlikely that advertising yields will reduce significantly.
Publishers cannot prevent bid shading
In the past, large publishers would veto the use of shading tools in their contracts with SSPs. However, the shift of power from SSPs to DSPs means that publishers cannot control the pricing process even when contracts explicitly forbid the use of bid shading. According to Dan Wilson of London Media Exchange, publishers cannot stop price manipulation because it is deeply entrenched in the advertising industry.
Bid shading increases the price of hiring vendors
Some vendors position bid shading as a means for buyers to reduce the prices they pay at first-price markets. They use it to add extra charges for their services. The effect is that buyers now pay higher rates than they used to under the old system. Indeed, some buyers now factor the extra costs when choosing the DSPs to hire.