Why Buyers Should Use Bid Shading

By Kevin Telkamp, Vice President, Media Operations at Ocean Media

Bid shading is a feature that enables buyers to leverage historical and predictive data to influence the bid price in a programmatic ad auction.

When bid shading is used effectively, it should result in improved win rates and savings for the advertiser; however, there can be inherent conflicts of interest, especially for any DSP that taxes the hypothetical savings.

To the supply side of the industry, bid shading is viewed as unsavory – particularly among SSPs or publishers that encourage bids that are true to the perceived value. Conversion-based bidding algorithms typically inflate bid prices based on the propensity to lead to an outcome; however, a buyer wants the bid to be just enough to win that auction and prevent overspending.

For example, if I’m bidding on collectibles on eBay, I may be willing to spend $80 on an item and not a penny more than the second highest bidder. If the second highest bidding collector wants to spend $50 on that item, I want to win by spending $50.01 rather than my $80 max bid.

In second-price ad auctions, this eBay scenario is automatically handled at auction time; however, the programmatic industry has largely moved to first-price auctions to ameliorate the concerns of supply-side operators that cried foul. In our example, the seller might argue that my perceived value of the item is $80, and that is the price that I should be expected to pay.

Bid shading takes over for buyers to lower their bids in the presence of auction types that are unforgiving to high bidding advertisers. Using predictive clearing technology, many DSPs will find the best value for those impressions, but still bid confidently at a rate that will win the impression.

Despite whistleblowing from publishers and SSPs that feel this use of technology is an affront to the way impression value should be treated, there isn’t much ground for them to stand on given the way the industry has already caved to their demands.

Personally, I view bid shading as a necessary tool that protects programmatic media buyers from overpaying on inventory purchased through a DSP. The adoption of bid shading became critical when exchanges followed Google’s direction in 2021 and moved from second-price auctions to first-price auction. At this point, it’s table stakes for any DSP to have bid shading available, and it is routinely enabled on campaigns that we manage.

Despite all of its benefits, bid shading becomes messier when a DSP’s outcome-based bidding algorithms are too aggressive – overly inflating bid prices and relying on bid shading to dial those bids back within reason. For DSPs that tax the savings differential from original bid price to bid-shaded price, it provides a clear exploit and is a conflict of interest that we need to consider.

When DSPs tax bid-shading savings, they can act in a way that provides a clear incentive for inflated bid prices prior to bid shading. For this reason, trust and transparency are imperative when working with demand-side partners that engage in this practice.

An alternative solution for programmatic buyers is post-auction dynamics, which encourage media buyers to enter the auction with a higher bid price to secure the impression but offer a rebate to the buyer from preordained agreements with each publisher. While post-auction dynamics are a valid option to ensure a balance of clearance and efficiency, the process is not as easily scalable, and it is difficult to manage operationally as it requires more collaboration among media buyers, publishers, and participating SSPs.

Bid shading is the low-hanging fruit of the programmatic ad-buying ecosystem because it’s often baked into most DSPs. It is readily available to utilize and much easier to leverage than post-auction dynamics, which has its own advantages.

Buyers should be able to use bid shading to pay a fair price relative to their competition, rather than bidding the value price. And that is why bid shading is contentious. Publishers want buyers to bid at the perceived value rate of their impressions instead.

For buy-side programmatic operators, I encourage the use of bid shading overall, because it is a way in which buyers are influencing the price of the bid downward for more efficient impressions.