What is the Difference: First-Price vs. Second-Price

First-Price vs. Second-Price Auction

Programmatic advertising is definitely the biggest innovation in digital marketing over the last few years. Step by step it changed the entire world of advertising. You’ve definitely come across terms such as  Header Bidding and Real Time-Auction – you have to be aware that they made new challenges in the programmatic world. 

While you are starting your adventure with the RTB software you need to know that there are two key types of auctions: first-price and second-price. 

So let’s dive deeper into the difference between them and why first-price auctions are getting more and more popular.

What is the First-Price Auction?

In the simplest terms, both auctions select the highest bidder as the winner of the auction. Makes sense, we want to choose the guy who wants to pay us the most. The difference comes when it’s time to paying. In the first-price auction, the winner pays us what they offered as their bid.

The type of auction gives a lot of transparency, advertisers know exactly how much they will pay for 1000 impressions and publishers know how much they will get. Thanks to this, it’s much easier to estimate expenses and incomes and plan a long-term strategy. 

First-Price Auction Example:

We have three advertisers taking part in the real-time auction. Each of them declares how much they are able to pay for 1000 impressions:

Alex offers $5

John offers $3

Chris offers $4

The highest bid offer is Alex and he is the winner of the auction.  Alex will pay exactly $5 per 1 000 impressions to the publisher/ad exchange.

First-Price Auction

What is the Second-Price Auctions?

In the Second-Price Auction, the highest bidder also wins. How does that work though?  Well, the winner typically pays $.01 more than what the 2nd highest bidder offered to pay.

Second-Price Auction Example:

We have three advertisers taking part in the real-time auction. Each of them declares how much they are able to pay for 1000 impressions:

Alex offers $5

John offers $3

Chris offers $4

Alex provides the highest bid again and he is the winner of the auction.  Alex will pay the publisher/ad exchange $0,01 more than the second-highest bid – which is $4,01

The reduction in price for the bid is the difference between what the highest-bidder declared they would pay and the final price per 1000 impressions. 

Second-Price Auction

You probably just thought …. OMG isn’t that amazing!? However, everything has its pros and cons, scroll down to find out more!

Aren’t Second-Price Auctions Always Better For the Buyer?

Now, I know what you’re thinking. If you’re an advertiser who’s bidding for traffic, you want the 2nd-price auction method, and if you’re a publisher who’s selling your ad space, you want the 1st-price auction method. 

Unfortunately, it’s not that simple. Let’s take a look at an example of header bidding using second price auction:

Header Auction.

Justyna made a higher bid than the winning bid, but she didn’t win. This is not beneficial for her as the advertiser if she wants this traffic. Why is this happening? In this scenario 2 auctions are taking place.

The first auction is the internal auction in the DSP where Justyna bid $16.00, which she wins because she’s the highest bidder. The second auction is external, between DSPs competing in the auction for the visit from the publisher.

Her DSP works on a second-price auction, so even though she wins, they select the second bidder’s price plus $.01 as the bid for the second auction, thereby bidding $9.51. 

Whether the publisher uses a first-price or second-price auction is irrelevant at this point because the highest bidder will still win. Since another DSP bid is $15.00 – which is less than Justyna’s original bid, but more than the bid her DSP used – the other DSP wins.

Most publishers use first-price auction so they can take the $15.00 bid – and the auction is done. As you can see, in this example, both the publisher and the advertiser lose. If Justyna’s DSP used first-price auction and bid with this price, she would have won the traffic and the publisher would have sold the traffic at $1 more.

First-Price Auction Advantages for the Advertisers

The fact you can pay less than you bid per 1000 impressions is very tempting, right? Let us explain what the positive sides are of the First-Price Auction:

  • The first-price auction goes great with the header bidding, not only allowing smooth simultaneous bidding, but also more competitive bids.
  • Clear financial strategy – the first-price auction allows you to precisely estimate your budget and predict your potential ROI. 
  • Stop unnatural overbidding – a very popular practice among advertisers using second-price auctions is making an exaggeratedly highbid since they are pretty sure that they will never pay that much even if their bid wins. However, these huge bids can create an unwarranted price increase. 

Smart Bid Adjusted to Your Needs – How our Bid Reach Works

You are new to the native ads market and have no idea how much traffic is worth? No, worries! Voluum DSP is here to give you a helping hand. Our developers have designed an amazing tool called Bid Reach. This AI feature based on collected data suggests a recommended bid per your targeting criteria. 

Bid Reach analyzes win rates and bid floors from the last 24 hours per specific targeting criteria such as Ad Exchange, Device type, and Country and then suggests what bid you should start with. We recommend starting with the level of bid reach that allows access to 75% of the available traffic and then after, analyzes the performance of the campaign accordingly. 

Doesn’t that sound great? We do not need to spend hours analyzing bid floors of a particular site or widget.  You can be sure that you will not overspend money unnecessarily, so you can save it to buy even more traffic through Voluum DSP. 

Bid Reach

So, What is a Conclusion?

Programmatic advertising has many layers and deals are made with many middle-men. Due to the architecture of auctions feeding into secondary or tertiary auctions, it’s not always in anyone’s best interest to use second-price auctions. 

Which Auction Price Strategy Does Voluum DSP Use?

From what we’ve gone over so far, you can see that both first and second-price auctions have their upsides. Voluum DSP  is the best of both worlds, as we optimize user bidding by having both first-price and second-price auctions.

Create Free Account

Voluum DSP is completely transparent about its bidding strategy and users can always see which Advertising Networks use which auction strategies during campaign setup. The example below shows what you might see during the bidding process with Voluum DSP:

DSP campaign creation form.

Bidding strategy is not the biggest determining factor of a campaign’s success. Factors like target demographic, offer vertical, choosing the right affiliate network, creative style, and others can be far more influential. So don’t get hung up on the first and second-price bidding auction when you’re optimizing your campaign.

Voluum DSP experts are here to help you!

Leave a Reply

Your email address will not be published. Required fields are marked *

You May Also Like