After months of testing, Google is ready to fully introduce first-price auctions to Google Ad Manager. Starting on September 10, Google fully transitioned to a first-price model after years of using a second-price model. Aimed at assisting publishers by helping them to bring in more ad revenue, first-price auctions mean major changes to Google Ad Manager.
How Second-Price Auctions Work
In the past, Google used a second-price auction to determine winning bids. In second-price auctions, the winner of the bid only had to pay the price offered by the second-highest bidder plus $0.01.
This led to a common strategy where you could bid way above market value to ensure you won as many impressions as possible. This strategy worked well for agencies and clients since they only had to pay 1 cent higher than the next highest bid.
For example, you want to win impressions for a highly targeted/valuable keyword. You might decide to bid $20, knowing that you’ll likely only pay $10.01 (depending on market value).
This model tended to be more friendly to the demand-side, while the supply-side publishers lost out on potential revenue.
How First-Price Auctions Work
Since introducing the testing of this model in early March, Google has clearly seen the benefits for their publishers. Under the first-price auction model, if your bid wins you pay exactly the amount you bid.
For example, using the $20 bid scenario we laid out earlier, if the buyer wasn’t notified of the bidding model change they would potentially be spending more money than anticipated. This is because they would now have to be clearing at the $20 they were bidding when they only expected to pay $10.01.
While Google has released its plans to transition to the first-price auction, many ad exchanges did not. This may lead to some unethical practices by untrustworthy ad exchanges.
Short-Term Effects of the Switch to First-Price Auctions
The jury is still out in regards to how the bid model changes will work out long-term. In the short term, our in-house experts expect it to drive up prices while bidders adjust to the new model.
Fortunately, many forward-thinking ad exchanges have already switched to this auction-strategy. This means that ad exchanges that have not switched will be most heavily affected when buying Google inventory in the short term.
Long-Term Effects of the Switch to First-Price Auctions
In the long-term, this strategy will be beneficial for publishers and generally negative for agencies and clients. Fortunately, our experts expect pricing and bids to level-off as more marketers become adjusted to the model.
We expect that as time goes on agencies/clients will become more accustomed to the first-price model they will adjust bids to only what they’re winning to pay or what they think the winning bid will be.
In fact, there may be long-term benefits for agencies. If publishers are able to generate more revenue through a first-price auction method, it would create an environment with less ad-spam. This would drive us toward a less invasive ad model.
Unfortunately, it may be some time before the market adjusts. In the meantime, expect higher bid prices as the industry becomes accustomed to the first-price auctions.
Positives/Negatives for Ad Agencies
There may be some debate over how much the first-price model will affect agencies’ approach to bidding. Our experts see this change as an opportunity for savvier agencies. Those with more advanced/ongoing bidding strategies will have to manage bid strategies more actively/effectively.
For example, using the $20 bid example from earlier, “set it & forget it” type agencies might be stuck paying much higher than they should. Or, if the market adjusts and outbids these agencies, they might start losing out on more and more bids.
A savvier agency will notice these adjustments and use data to effectively neutralize the cost differences in the switch to a first-price model. It could even end up saving clients money.
The move to a first-price model gives Conduit a significant advantage over “set it and forget it” agencies. Since we provide constant optimizations, we can actively alter bids to identify a sweet spot for our clients. This will deliver the same inventory for a lower price than competitors.
For example, Conduit and Agency B both start bidding at $2 for their clients. With significantly more inventory available in the market, Conduit actively lowers the bid while maintaining delivery. Conduit will then clear at a lower CPM than Agency B. This allows for more inventory for clients without losing quality.
Overall, first-price auctions will create some uncertainty in the bidding world, especially at first. While initially being more beneficial for publishers, the demand-side of the platform may see both positive and negative changes. As agencies and clients adjust to the new normal, savvier agencies will be able to effectively adapt while “set-it and forget-it” agencies will fall behind. As America’s Digital Agency Connection, Conduit will continue to be at the forefront of bid adjustments and ad-exchange campaigns.