To those who are slowly graduating from AdSense to Ad Exchange, and further looking for options to increase their Ad Exchange and programmatic revenue, this post is definitely for you. Also, if you’re someone who is only running AdSense on your blog and have almost close to 1 million page views on your blog or website, again, you’re missing a substantial part of your ad revenue and this post is for you as well. Today, in this post, we are going to discuss how price floor optimization can essentially increase your overall programmatic ad revenue. Well, for me it was really difficult to understand that how price floors can increase ad revenue, but after doing some substantial research, I am convinced that this really work and I have been able to successfully implement the same strategy on my DFP and thus, I feel this is one of the most crucial post about revenue optimization at Blognife. Before we take a dive into price floor optimization, we need to know the CPM buying mechanics and thus shall get ourselves acquainted with first price and second price auctions.
How Media Buying Works?
Marketer, advertisers, and media buyers use various DSPs, Exchanges, and Trading Desks to buy media on behalf of your clients or for their agencies or brands. Generally, display media is bought programmatically and these media buyers prefer CPM targeting as it provides a more appropriate model and is effective in the long run. So, the media buyers pay a flat fee for every 1000 impressions which are auctioned and displayed.
In order to buy an impression, an advertisers has to make a specific bid which is then auctioned with other buyers. The buyer who places the highest bid is the winner of the auction and his or her ad creative is passed to the publisher website and the impression is served. So, if the number of competitors or bidders increase, you should essentially place higher bids to have a chance of your ad loading on the publisher website. Since a lot of these processes are automated by DSPs in order to provide the highest possible ROI to the publishers, the media buying on CPM models has become one of the most preferred media buying technique for advertisers.
First Price Auction Mechanics
In a real-time bidding environment, buyers bid on your ad spaces at specific rates. The same buyer may be bidding at your ad space through different DSPs and Exchanges. The bids may vary and depends on factors like competitors who are bidding on the same ad space. Higher the competitors, higher should be the bid so that the winning impression is credited to the buyer. In a first price auction mechanics they buyer has to pay the actual amount which he or she is bidding on the impression if the impression is won by him. So, if there are 3 advertisers who are bidding at $1.44. $1.23, and $2.1 for a particular impression, the one who made the bid of $2.1 actually wins the auction and pays the publisher the rate of $2.1. This is defined as first price auction where the advertiser or the marketer ends up paying what he or she has actually bid on the impression. However, this might result in bit higher price variation as the buyers have limited knowledge of the quality of the impression and other first-hand information which makes it possible for them to make bids. In order to overcome this fallacy, second price auction has emerged.
Second Price Auction Mechanics
Second price auction is declared by many exchanges like Google ADX and others to protect the interest of the buyers and give them the flexibility of bidding at rates they truly believe but at the same time doing a justice to their advertising spend. In a second price auction environment, the buyer will pay 1 cent more than the second highest bid price which is auctioned and not his or her actual bid. Assume a case where 4 advertisers have bid for the same impression which and their bids are $1.5, $2.2, $3.17 and $1.88. Here, the buyer who wins the auction has made a bid of $3.17, however, the second highest bid is $2.2. So, essentially, if the buyer had made a bid of $2.21, he would have won the auction at that price and would have made a saving of 96 cents. Ideally, this is what happens in a second price auction where the buyer actually ends up paying $2.21 and not $3.17.
The Importance of Price Floor for Publishers
Normally, there is a huge gap between first price auction and second price auction. Google Ad Exchange which is one of the biggest buyers of ad inventory runs on a second price auction mechanism. The importance of price floor optimization comes into effect as putting a price floor from the end of the publisher makes the second price auction turn to a first price auction and thus publishers can earn higher revenue from their ad impressions. Assume, there are again 4 buyers who have made their respective bids on your ad space which are( $1.7, $1.5, $2.2 and $3.5) So, if you’re setting up price floors on your SSPs and optimizing it well, you should be able to see additional revenue coming towards you. Typically, there are two price floors- soft price floor and hard price floor which are capable of making the auctions turn into a hybrid one giving maximum revenue to the publishers. Maciej Zawadziński, CEO of Clearcode and Piwik Pro explains in his Quora post how soft price floor and hard price floor changes the auction dynamics. According to him,
Hard Price Floor: A hard price floor is the lowest price for the impressions that publishers agree to accept from ad exchanges. Bids below this price are simply discarded.
Soft price Floor: A soft price floor “catches” the offers that are only slightly below the hard floor and would otherwise get rejected with no yield for the publisher. But what is the origin of hard- and soft-floors in RTB? Publishers are looking for ways to regain some of the lost revenue resulting from the reduction, i.e. the difference between the bid price and the clearing price in second-price auctions. A combination of soft and hard price floors essentially converts the auction into a hybrid between first- and second-price auctions.
Here’s an example that illustrates how a combination of the price floors works and why it makes sense for the publisher:
Explanation: The hard-price floor eliminates all the bids under the hard floor of $4.25. The bids slightly below the hard-price floor take part in a first-price auction unless there are bids above the soft price floor, which then take part in a second-price auction instead. But what’s the purpose of this? Such modifications offer the best of both worlds – high-value bidders can avoid paying surplus as they are charged per the second price. Conversely, in the absence of high-value bidders (no bids above $4.75), the low-value bidders (with bids below the soft price floor) are charged per the first price, thus maximizing the publisher’s yield. Exchanges implement flooring methods to combat low bid density. Header bidding further raises the floors, and exchanges are even considering abandoning the auction type altogether. Whether the first-price auction model will, with time, become gamed like the second-price model remains to be seen.
How Price Floor Optimization can Increase your Programmatic Ad Revenue?
Exchange bidding, DFP First look, mediation, and SSPs together can definitely increase the worth of your overall ad impression. If you’re planning to increase your programmatic ad revenue, I would suggest you start with DFP as your preferred ad server since it can significantly increase your overall revenue with proprietary technologies like DFP First look (available to DFP SB) and Exchange bidding (only available to DFP Premium).
The standard hierarchy of line items in DFP is as follows–
Sponsorship (Priority 4)
Standard (Priority 6,8 or 10)
Network (Priority 12)
Price Priority (Priority 12)
Ad Exchange (Priority 12)
AdSense (Priority 12)
Since the fill rates would depend on your SSP’s price floors, a good programmatic passback strategy would be like–
DFP First Look>> SSP1>>SSP2>>ADX>>AdSense
Since DFP first look competes above the Sponsorship line items, the impressions which are worth the most to AdX buyers will be automatically taken. Next comes an SSP (better if they are header bidding capable) since it will give you the highest possible bid. ADX will continue to mediate through Dynamical allocation and will take impressions either via your DFP linked ADX or via bidding through the first SSP. The unfilled impressions from the first SSP should then be either transferred to SSP2 (passback tags) if you have an additional strong SSP or you can use your own ADX line item. I would suggest you keep adsense tags at the bottom of the passback strategy since any remnant impression will be passed to AdSense and you can earn from it. Here, you might have to monitor the fill rates, the impressions lost due to the implementation of passback tags, but your overall revenue would be much higher since the price floors would essentially turn the second price auctions into a hybrid auction where the advertisers are bound to pay higher.