What Google’s Shift to First-Price Auction Model Means for Publishers

Google announced that they will be switching to first-price auctions at the end of Q3 of 2019.

The first-price auction model is used by many SSPs already, and soon Google will implement it as well on the Ad Manager level. The majority of the programmatic world is already familiar with this auction model, but Google is a dominant player, and this change may impact the whole market.

As we are a revenue-optimization company working for hundreds of publishers worldwide, we have received many questions about this change. In this article, we’ll answer the most common ones:

Do I still need to manage floor prices to increase revenue?

Second-price auction:

Yes, but it will be harder.

• In a second-price auction, it’s important to understand the first and second bid.
• You optimize revenue when you set up a floor price between those bids.
• The change in floor price is easy to observe in the revenue per 1000 impressions or revenue per 1000 visits.

First-price auction:

• In a first-price auction, the publisher earns exactly what the advertiser bids.
• In the short term, any floor price cuts off some part of the bids and therefore reduces revenue (revenue per 1000 impressions and revenue per 1000 visits).
• Short-term optimization goes to the buy side. DSPs will send lower and lower bids to test how cheap they can buy certain inventory.
• In other words, even if buyers can buy traffic for $10 / CPM and have good business, why not buy traffic for $0.20 CPM? The margins are much bigger!
• To protect revenue, the publisher needs to understand the real value of the inventory for each advertiser and campaign, and then apply appropriate pricing strategies.
• This is much harder than it is in the second-price world.

Why did Google decide to implement this auction model?

Google claims that the biggest reason behind this change is that it wants to simplify things in programmatic. The market has become increasingly complex in recent years, and buying and selling strategies were too complicated. According to Google’s latest announcement, it just became too much, even for experts.

We asked a few publishers, media agencies and Ad Tech providers one general question: How do you think Google’s switch to a first-price auction model will influence the programmatic market?

We received many answers, and you might be surprised at the range of responses. Some expressed their concerns due to the switch. Others are looking enthusiastically toward the future.

“I’m always very curious to see how the industry reacts to a change of such scale. There’s going to be a lot of coverage, ‘best practices’, and guides, therefore it is essential to have a trustworthy partner during this process. Otherwise, it’ll be too easy to get lost in the sea of information.”

Arnas Levickas
Product Owner

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First-Price vs. second-price Auction – What Are The Main Differences?

The main difference between these two types lies in a model of determining the final price paid by the buyer, despite the fact that the bid was the same in both cases. So far both these models have been used simultaneously. Second-Price by Google, and the First-Price by most of the other large SSPs. In effect, the market was a little mixed.

How should publishers prepare themselves for the change?

Publishers should:

• Try to convince buyers to move to pre-agreed deals instead of selling inventory on the open market – but only premium publishers have this chance – to stop them from trying to buy cheaper and cheaper.
• Manage floor prices by observing competitors.
• Manage floor prices by observing eCPMs and revenue per advertisers.

Will this switch impact header bidding?

Header-bidding demand competes with Google demand and brings publishers money in three ways:

• Header-bidding platforms bring new buyers (this will still be important).
• Header demand pushes Google second-price auctions (this will disappear).
• Header-bidding platforms have smaller margins than Google, so net bids are higher (this will be still valid).

How is Yieldbird prepared for this change?

In short – it’s a big change, but we are prepared for it.

We rely on technology, data, and our experience, and can improve publisher open-market revenues by applying our technology in all types of auctions. We look forward to this change and what it will bring.

How does Google’s switch to the first-price auction impact advertisers?

DSP buying algorithm collects all historical data about transactions. It does that to build a purchase model that fits the first-price auction reality. This will help it find an optimal bid rate for a specific auction. The data collected includes many variables like cost, ad-size information or win rate.

Drawing on this, it searches for an optimal price while maintaining the purchase potential and makes the decision to take part in the purchase. This way, it protects buyers from overpaying. The DSP is bidding a little cheaper, so for publishers, it may mean lowering the value of their space.