Aug 22, 2021 4 min read

Real-Time Bidding Explained - How do ad auctions work?

Real-Time Bidding Explained - How do ad auctions work?

Real-time bidding or RTB is a digital advertising strategy where multiple entities bid in a real-time auction to purchase advertising inventory on a website or app. An auction is "real-time" because advertisers submit bids simultaneously when a user loads a website page or app screen with an ad unit.

What came before real-time bidding?

Back in the old days, before real-time bidding, advertisers typically pre-purchased all ad inventory from publishers. Advertisers would look for websites to purchase ad space from where they thought their target audience would visit.

A publisher would create a media plan that includes the type of ad units available, the price, and the number of impressions they can deliver over a specified time period.

The advertiser and publisher would then sign an "insertion order" or "IO" that would lock these details in place and serve as a contract to run a campaign based on a media plan. Yes, this was a real-life document that needed a real-life signature. Real-time bidding offered a replacement to this time-consuming process of creating media plans, insertion orders, and communicating back and forth.

While publishers may still want to use an insertion order due to their guaranteed revenue stream — real-time bidding introduced a much more efficient way to buy media and ushered in the era of programmatic advertising. Think of programmatic advertising meaning "automated" advertising or advertising powered by programs or computers rather than humans exchanging IOs.

What is real-time bidding?

Real-time bidding is a concept of programmatic advertising where multiple companies will submit a bid to compete for the right to display their ad on a publisher's website or app. Advertisers and publishers run auctions via a choreographed song and dance through technology platforms referred to with acronyms like "DSP" or "SSP".

If you spend any time researching ad tech, you quickly realize that this industry loves its acronyms. As sure as the sun rises in the East and sets in the West, the digital advertising industry will keep inventing acronyms to describe the various technologies and players of the game.

In this case, an SSP or Supply Side Platform is a technology platform used by publishers to sell ads programmatically and to conduct a real-time auction on their behalf. A DSP or Demand Side Platform is the tool used by advertisers to submit bids to the SSP. These two platform types communicate with each other using a standardized specification called ORTB or Open Real-Time Bidding.

A DSP can submit multiple bids to an SSP, and an SSP can collect many bids from many DSPs. A variety of other processes occur during this auction process to filter bids, but for the sake of simplicity, the SSP selects the highest price bid as the winner and sends the creative (banner ad, video ad, native ad, etc.) to the publisher for delivery.

Why do publishers and advertisers use real-time bidding?

Publisher advantages

Publishers who start using an SSP and put their inventory up for auction can instantly open themselves up to many new buyers. Publishers would find it prohibitively laborious to manage hundreds of different buyers directly.

The nature of the auction process can also command the highest price possible for inventory that may have gone unsold. Without real-time bidding, unsold or "remnant" inventory may have gone to waste if the publisher did not sell enough upfront or underestimated their inventory availability.

Advertiser advantages

Similar to publishers, real-time bidding can open up many new inventory opportunities for advertisers. Advertisers can connect to thousands of sites and apps through all the SSPs connected to their single DSP.

Advertisers can tweak their approach to hit their KPIs (key performance indicators) for the lowest price by optimizing bidding strategies. Real-time bidding can facilitate an advertiser meeting their goals at the lowest price. Advertisers can optimize to reach the widest audience (impressions), highest engagement (clicks), or most brand-safe placements easily through RTB.

Is real-time bidding only used for non-premium inventory?

Real-time bidding grew in popularity since it offered an easy and efficient method to monetize previously unsold inventory. However, the negative connotation of "unsold" being undesirable has waned in recent years as publishers and their SSP partners have uncovered ways to increase the value and exclusivity of inventory offered through a real-time auction.

Publishers can segment inventory into "private marketplaces" or PMPs (I told you we love acronyms), where they offer premium inventory only to select buyers. Publishers set a "floor price" on PMPs to ensure they receive a minimum bid price for the inventory in the marketplace.

Where does real-time bidding fit into a modern publisher's programmatic strategy?

Virtually all publishers implement real-time bidding into their advertising strategy in one way or another. The innovation of real-time bidding gave rise to programmatic advertising, and publishers have found ways to blend direct and programmatic advertising to maximize their revenue.

Publishers will still take direct ad buys at a flat CPM rate upfront, but are increasingly checking with their SSPs to see if they can beat the price of their direct buy in real-time through a process known as header bidding.

Real-time bidding was born out of the need to fill unsold inventory, but now the strategy helps publishers find the highest priced ads available across direct and auction-based buys.

Photo by Jonathan Chng on Unsplash

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