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Bid shading, an optimisation practice used in programmatic advertising, is likely leading to $6.6 billion in wasted advertising spend each year, according to a study spearheaded by aritifical intelligence marketing company Cognitiv.
In partnership with independent research agency, Alter Agents, Cognitiv’s research queried more than 250 US digital media buyers to explore the complexity of today’s bidding environment and how current solutions are performing for advertisers.
Considering that last year, advertisers spent $109.4 billion on programmatic advertising (excluding search), an evolved approach to bidding is essential.
Today, the primary method for programmatic advertising involves a first-price auction. However, in order to avoid overbidding, many buyers employ bid shading, an algorithm that utilizes historical winning bid prices for a given advertising placement, suggesting an optimal bid for advertisers.
The introduction of first-price auctions and bid shading aimed to rebalance the power dynamics between advertisers and publishers, while promising greater transparency in the bidding process.
Yet, the focus on transparent pricing provided by first-price auctions was found to shift the balance of power towards the publishers. Cognitiv’s research study found that 75% of digital media buyers believe the switch to first-price auctions has ultimately served publishers more than advertisers, and 64% attest to first-price auctions causing CPMs to increase.
Overall, the study concluded that more than a quarter of digital media buyers indicated that the transition to first-price auctions in programmatic media buying impacted their company negatively.
Given rising CPMs and growing discontent among advertisers around the increasing costs of buying in a first-price auction environment, a new stop-gap solution was introduced by publishers: bid shading. Now an industry standard, bid shading serves as a middle ground between second-price and first-price auctions, helping to ensure that advertisers feel like they are getting a better deal on inventory while still preserving the first-price environment.
Cognitiv’s study found that a third of digital media buyers do not even know that bid shading exists, and only 35% feel extremely confident in their understanding of how a bid shading algorithm works and that they can explain it to others.
Yet, 70% are paying an extra fee for this tool, assuming that it is saving them money.
The data further reveals that a vast majority of digital media buyers cannot agree on what bid shading does. 33% of responders said the tool “adjusts their bids for a forst-price auction”, while 32% said it was an algorithm that optimised their win-rate and CPM.
Meanwhile, 12% said it was just another fee to their bid.
“Bid shading is a generic tool across all campaigns that does not take into account an advertiser’s category, unique campaign goals, or the specific individual being reached by the ad, but instead treats each campaign the same,” said Aaron Andalman, Co-Founder and Chief Science Officer at Cognitiv.
“Advertisers need a permanent solution, one that is designed for advertisers by media buyers, not a solution that publishers offered as a stop-gap solution to keep advertisers placated.”
