Advertisers: You’re overpaying for inventory. Here’s how I know

During my teenage years, my father instilled in me the value of a dollar and the fundamental principle of “buy low, sell high.” Each year at the Long Beach Coin Show, we’d buy a few rolls of 1960s Franklin half dollars for about $10 each and then sell them individually on eBay for around $16 after fees and shipping.

We sold each coin via a second-price auction format where the winner of the auction went to the highest bidder who paid the price of the second-highest bidder. So, if Person 1 bid $17 for a coin and Person 2 bid $16, then Person 1 would win the auction but pay $16 – the price of the second-highest bidder. As the seller, I also had the right to set a reserve price. I was in no position to sell coins for less than $15 (I had a girlfriend and dates to pay for!).

Had I known then what I know now, I would have paid more attention to past bid patterns and set my price reserve at $16.50. But as it turns out, the lessons eBay instilled in me surrounding bid price seem to have been missed by much of the advertising community. Think about it this way: Supply Side Platforms (SSPs) work to earn publishers the highest price possible. Who’s helping the advertisers keep their costs in check?

I’ve now spent almost a decade in ad tech and work in an environment where the lessons of my adolescence are very much a reality. It’s an ecosystem in which tens of billions of ads are being sold in a second-price auction format every day with smart technology that enables a publisher to maximize their yield by learning from an advertiser’s past bid prices.

A publisher can now set a price reserve for every impression and learn from previous auctions, billions of times over. So if Advertiser 1 is willing to bid $17 for an impression and Advertiser 2 bids $16, the technology is so sophisticated that a publisher can set a price reserve at $16.9999, making Advertiser 1 pay the second-price auction cost so long as it meets the reserve. In this case and so many others, $16.9999 is the price paid by the advertiser. The advertiser is happy because they won the impression and the SSP and publisher are happy because they garnered the highest possible yield for their inventory. But maybe, the advertisers shouldn’t be so content.

Operating in a Demand Side Platform (DSP) is challenging enough for advertisers and agencies because it requires traders and analysts to know how to set up a campaign, how to choose the right target audience, how to deliver the desired budget up against that audience and how to hit the KPIs that matter most. And let’s not forget that they must do all of this at the lowest possible price. The reality for most agencies and advertisers is that once a budget is allocated, the last thing to get addressed is the bid price. At the end of the day, an advertiser is happy when the budget and performance KPIs are met. They’re likely unaware they could have gotten two or three-times as many impressions for the same amount of money – and that’s a problem.

Think about it this way: A trader on the advertiser/agency side determines a max bid CPM based on what they think the inventory is worth, maybe changing the max bid a few times during the life of a campaign. Most DSPs get paid a tech fee based on the percentage of spend and therefore have zero incentive to help you spend less in their platform. Meanwhile, millions of websites are individually changing their price reserve on potentially every impression, for every advertiser and every user all day every day. Good luck, advertisers!

So, what can be done? Short of hiring scores more traders and analysts to focus on price (which could negate your savings), you simply must settle for paying more than an impression is ever worth whether transacted through a first- or second-price auction. That’s why it’s time for DSPs to feature opt-in and most importantly, transparent bid algorithms that will optimize on your behalf. Your DSP’s mission should be to obtain maximum value for your dollar by achieving the lowest possible price while still maintaining your much-needed delivery and KPIs, all while transparently showing you how efficiently you’re buying compared to others who opt to go at it alone.

I was never quite smart enough to figure out price reserves in eBay as a teenager. In my defense, that might not have mattered – partially because my lifetime coin venture profit was $314, but mostly because the aforementioned girlfriend has since become my wife and the mother of my two children. It worked out in the end for me, but for advertisers (and agencies who represent them), it’s time to even the playing field by having your DSP work harder for you. The time has come to stop overpaying for inventory and allowing publishers and SSPs to take advantage.