What is Header Bidding and why should I care?

By now most people understand that programmatic display is primarily an auction based advertising channel. But dig a little deeper into the way publishers decide which ad to show, and you will see that it’s not always the case that the highest bidder wins.

Header bidding ( also known as advance bidding or pre-bidding) is the latest technology challenged with levelling out the playing field and is having a big impact on the programmatic display landscape.

Not all auctions are equal

When people are told that an advertising channel is auction based, they rightly assume that means highest bid wins. And in some cases this is true.

But in the fight to both maintain revenues, and satisfy their advertising partners, publishers are not always selling to the highest bidder, and not even in a single auction model.

The original programmatic auction model operates what is known as a “waterfall” to decide whose ad ends up being shown to the page visitor. As the description suggests, this is a decision model with different inventory sources stacked in preference which their technology working down the list until a bid is secured.

At the top of the list may be the advertisers who have booked directly. With these deals the publisher has often guaranteed a certain number of impressions and also sold at a higher CPM. The impression will first be checked to see if it matches a direct buy. If no impressions is available it will then work down the waterfall in order of priority until it secures an advertiser willing to pay.

Within the waterfall could be multiple ad exchanges, running independent auctions, and will generally end with an open exchange buy taking the highest available bid from whoever is willing to pay.

Any auctions within the waterfall would generally operate on a 2nd price basis meaning the winning advertiser pays a penny more than the one in second place.

What’s wrong with the waterfall?

Fundamentally there is nothing wrong with the waterfall approach. It allows publishers to control the priority order of the inventory they sell on their websites. It also allows for a high fill rate as inventory sources can just be stacked up ensuring there is always somebody to fill the ad slot.

It does however have a number of draw backs:

  • It can result in a sub optimal CPM for the publisher. It could be a direct advertiser at the top of the waterfall secures the impression at a lower CPM than would have been available on one of the exchanges towards the bottom. Or it could be that there are multiple exchanges in the waterfall and the first wins with a bid which would have been beaten by an exchange below. Either way the publisher loses out.
  • Operating in this ways requires multiple ad calls to be sent and received to multiple external locations. All of which increase the load time on both the page and the ad. At best this slows down the page for the user, at worse it could mean no impression is shown at all as the user closes their browser or leaves before an ad was shown.

How does header bidding change things?

The biggest thing that changes in a header bidding scenario is all of the calls to advertising providers are made simultaneously, and then the returned bid information can be compared to see which is advertiser wins overall. This should mean the publisher maximises the revenue for each impression.

It should also mean less delay in page load or ad load as there is no multiple back and forth ad calls. As well as controlling load time through inventory sources to be discounted if they take too long to respond.

For advertisers it could mean higher costs. However the extent to which this happens across the industry as a whole remains to be seen.

And about that second priced auction

The other thing that is expected to change as header bidding evolves is a move away from a second priced auction to a first priced auction. What this means is an advertiser will pay their maximum bid submitted, not just the minimum required to win the auction. So if advertiser 1 bids $2.99 and advertiser 2 bids $3.40.  In a second price auction advertiser 2 would pay $3.00 to secure the impression, but in a first price, header bidding world they would pay the full $3.40.

So header bidding is the future?

Actually it is already being used by almost 70% of US publishers, but it is already evolving. As much as it is credited with helping publishers revers declining revenues it is still far from perfect.

Despite speeding up the ad load with its simultaneous calls, it is still reliant on tags on the page creating multiple calls to multiple places across the internet.

The next iteration of this evolution is server to server header bidding.  This method removes the calls from the web browser and puts it into a server to server environment. Further reducing any issues with page and ad load speed and making the process even quicker.

This, combined with first price auctions, represents the biggest win for publishers as it allows them to scale inventory sources without affecting page load and ensure they secure the maximum price for every impression.

What does this all mean to advertisers?

The immediate thing you may see as a result of header bidding is a rise in costs. Due to the increased competition across inventory sources, and the potential for first price auctioning, CPM rates on publisher could be set to increase.

It could also mean that large advertisers are less able to get preference on inventory, which could be a good or a bad thing depending on who you are. ‘First look’ inventory is not impossible in a header bidding environment but it is not as straight forward as in a waterfall setup where all a publisher has to do is place the advertiser higher up the chain.

For big advertisers this means an end to preference over impressions, for smaller this could be seen as a levelling of the playing field.

Aside from cost, the main thing it may mean for advertisers is a shift in bid management strategies. In a 1st price auction having control of your ceiling price is key to managing costs, so a closer eye will need to be kept on bids levels to prevent cost getting out of control. Testing bid prices to find the optimal level will become more important as setting a single ceiling price won’t be enough for optimal efficiency.

All in all there are more positives to header bidding than negatives, however as with any change to the bidding landscape, it is important advertisers keep a close eye on the impact and amend their strategies accordingly.

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About Rob Weatherhead

Rob Weatherhead is Group Operations Director for Dentsu Aegis Network. His current focus is on Programmatic Advertising and Technology as it disrupts the traditional media buying model.