Programmatic Advertising 101 — Supply vs Demand
This series of posts will cover basics of Programmatic advertising. The topics will loosely fall into the following posts:
- Supply vs Demand — An overview of programmatic concepts
- Agency models — who and what are agencies, ad networks etc.
- Metrics and reporting — what are the key measurements and why are they important?
- DSPs — The demand side technology of AdTech.
- SSPs & DMPs — Supply and Audience management
- Optimization options — How audiences and inventory can be optimized to create an efficient bidding marketplace.
- Creatives — Types of creatives and creative optimization
Supply and Demand
Most commercial success comes from mapping supply to demand, in programmatic advertising that Demand comes from Advertisers and the supply comes from Publishers. How so?
Advertisers have a demand to show their adverts to potential customers. In online terms, these adverts are called Creatives.
Publishers have a supply of places to show these creatives to potential customers. These places are collectively called Inventory.
Advertisers are any company who has a product or service they wish to sell and are willing to pay money to attract those potential customers or educate the public on their products or services.
Publishers are any content supplier - traditionally this comes from newspapers but in programmatic it refers to any content website or mobile application where an ad could be shown. Advertising often becomes their primary revenue stream.
Given the above, its clear that Demand side platforms (DSPs) are focused on the advertiser needs whereas Supply side platforms (SSPs) are focused on the Publisher needs. There are many more players involved which will be covered in a future post, for now — lets review the supply/demand exchange.
Inventory is the product being sold by Publishers, to Advertisers. In traditional advertising Inventory could be a billboard ready for a poster, on television it is a commercial slot. Online, inventory refers to an Ad impression. An Ad impression is a single placement of an ad on a web page (or in a mobile app) — this could be a static image, a video or interactive HTML 5 animation.
Traditionally large manual publisher to advertiser relationships were created with sales teams and bulk sales. This model is obviously not efficient, and doesn’t allow advertiser or publishers to get the best price for their sale. Programmatic advertising took these basic concepts and provided an open marketplace for Advertisers to bid on each individual inventory opportunity, creating a very efficient environment for advertising.
These programmatic marketplaces allow for bidding on individual inventory slots in real time, hence bidding in this way is known as Real Time Bidding (RTB). There are millions of such transactions occurring each second — each one takes less than 50ms.
So the objective of programmatic advertising is for:
DSP’s to Attract the best customers, at the cheapest rates, for the advertiser.
AND
SSP’s to Sell the most inventory, at the highest rates, for the publisher.
Since these are two competing objectives, an auction is used to sell inventory to the highest bidder. This auction is managed by an Ad Exchange.
The chain of events in the above diagram shows how an SSP acting on behalf of an publisher sends a Bid request to the exchange, which solicits Bids from any number of bidders (Typically a DSP). The bids are evaluated and the winning bid is determined by the exchange who notifies the DSP it has won the bid, and passes the creative information for the won bid onto the SSP who in turn passes it back to the Publisher who will use this information to show the Ad on their website. All this needs to be done very quickly to ensure the Ad is displayed by the time the page is loaded. As such SSP’s and Exchanges have very low tolerances for DSP’s to bid, if a DSP is too slow to respond, they are ignored.
If a true highest price wins auction was used, bidders would attempt to guess what the lowest price they could win at would be. This causes inefficiencies in bidding and so a second price auction is typically employed to encourage bidders to bid the true value of the opportunity. In Second price auctions the highest bidder wins, but pays the price of the second highest bidder.
It is possible for publishers and advertisers to bypass this auction model in a programmatic environment, and sell programmatically but not via real time bidding. This can be achieved using a variety of private marketplace (PMP) techniques, the most common is uses a DealID to identify a particular inventory slot as reserved for specific advertisers. DealID’s are simply a unique identifier that is passed along with the bid request so that advertisers can identify which opportunities they have agreements on. There are variants on private marketplace offerings:
- Preferred deal: Provides an advertiser the option to buy inventory at a fixed (pre-agreed) price prior to it going onto the auction.
- Private auction: Limits the auction to an agreed set of buyers above a floor price.
- Open auction: Typical auction where anyone can bid and the inventory can be sold above a set price.
Now that the auction mechanism is in place, our attention will turn to how we optimize matching supply and demand to increase price for publishers and reduce cost for advertisers. First up, will also review the key players in the supply chain such as agencies and trade desks — in Part Two
