(This is Chapter 10 of the Adomik Programmatic Yield Management Handbook)
To optimize RTB Yield Management, a solid understanding of auction mechanics and 'flooring' is critical
For most people, the term auction conjures images of a person on a stage rapidly firing off barely intelligible values while people in an audience wave a numbered fan. However, for those of you reading this blog an auction has a significantly different meaning. As you know an auction is the mechanism by which RTB impressions are sold in ad exchanges. You may have heard the term Vickrey Auction or Second Price Auction but rather than define these different terms this post aims to explain the standard auction mechanisms in ad exchanges.
Basic RTB auction mechanics are quite simple: Each buyer submits a bid value, the winning bid or highest bid wins the auction and pays the price of the second-highest bidder plus one cent.
Take a look at the diagram below which outlines what a standard auction looks like:
The case above is a very simple second price auction, as you can see this auction only contained three bids, with the winning bid at $1.00 and the second highest bid at $0.50. The result of this auction was that Bid 1 won the auction and paid $0.51.
However, many auctions have floors applied to the inventory or the demand sources. Before we cover what an auction looks like without floors, it may make sense to define the different types of floors that are in play in different auctions.
Price Floor Types:
- Hard Floor - A hard floor is a floor value entered by the publisher or seller on a placement, placement group, buyer or geographic level that signals to the auction that no impressions can be sold below that value. In an auction with a hard floor, buyers must bid above the floor in order to win that auction, if no bid is submitted above the floor no buyer will win this auction.
- Soft Floor - A soft floor is a floor value entered by a publisher or seller that acts like a traditional hard floor if the buyer bids above it, however if the buyer bids below the soft floor the buyer will still win the auction but will pay first price - or the value of the bid they submitted.
Let’s take a look at what auctions with price floors look like:
Example 1: Auction where Hard Floor > Highest bid = No auction winner
In the auction above, the auction will not resolve and no one will win since all of the bids are below the hard floor.
Example 2: Auction where Highest Bid > Hard Floor
In this auction, Bid 1, located above the floor will pay the Hard Floor and the auction will resolve at $1.01.
Example 3: Auction where Soft Floor > Highest Bid
In an auction where the soft floor is above the highest bid, the auction will still resolve with Bid 1 paying first price or $1.
Example 4: Auction where Highest Bid > Soft Floor
In this auction where there is a soft floor between Bid 1 and Bid 2, Bid 1 will win the auction and pay the Soft floor or $1.01, in this case the soft floor functions exactly like a traditional hard floor.
Deciding what will have the most impact for your inventory
As you can see there are quite a few flavors of floors and auctions, but one of the main reasons it is important to understand auction mechanics is to decide which flooring strategy will be most impactful given your exchange integrations and your business constraints.
For sellers that have strict business constraints, meaning that they need to ensure that all the impressions on a specific set of inventory is sold above a certain price, hard floors are the most effective way to achieve this goal. However, as we will cover in In future editions of the programmatic yield management handbook there is a wide array of analytics and optimization tools that can help you understand your demand and optimize your yield more effectively.
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