At a recent industry conference, a controversial topic that crept up on panels and during networking portions was dynamic floors. For the uninitiated, dynamic floors is the practice of a supply side platform or ad exchange bumping up the clearing prices of auctioned-off RTB inventory to more closely match the highest placed bid. It is done arbitrarily and ad buyers should care because they may be spending more than they should be.
Throughout my day-to-day dialogue with buyers and through my discussions at the event, it’s evident that no advertiser believes in dynamic floor pricing, a position I maintain as well. Publishers who have employed it also have mixed reactions. So why are some selling platforms practicing it? It is done to fill a gap in liquidity that currently exists in the RTB marketplace. The trouble is this could widen the gap in the long run by diminishing buy side trust in the RTB model.
Here’s why this happens. Real-time bidding is all auction-based. In fact, it’s predominantly a second price auction – highest bidder wins but pays the second highest price – usually a penny more. During bidding, one buyer may bid $2.00 CPM and another may bid $50.00 CPM for the same impression. That’s a huge gap, but the winning bidder will only pay $2.01. That buyer isn’t expecting to pay $50.00, but she bid that way to win. The buyer probably knew she’d pay around $2.00 or a little more, assuming competition for the impression was heavy. If she starts seeing her $2.01 CPM clear price bump up to $5, $10, $20, $30, she’ll get suspicious.
With dynamic floor pricing, the auction automatically raises the clearing price to the middle of the two highest bids, not based on actual bidding behavior, but instead on past bid activity from the buyer. It’s like robots automatically bidding up your price in the absence of true buying activity, based on what you bid. This is a manipulative variant of the second price auction. This practice discriminates against buyers by effectively using their bid against them, and violates buyers’ trust because of how they’ve been bidding. This is an unfair and opaque market force artificially creating a price because of how advertisers valued an impression in the past. In a true second price auction, buyers should pay the second price – not a manipulation of the price. Buyers who are aware of this are starting to move budgets away. Paraphrasing Meredith Goldman of Criteo, during a conference panel, when Criteo finds out that a marketplace isn’t operating a true second price auction, the company “will immediately cut bids.” Clearly this practice isn’t helping anyone.
Let’s compare this to bidding for baseball cards on eBay. If I’m a collector and I have enough expertise to know the value of a Babe Ruth Yankee card, I’m going to bid for the card at a calculated price, expecting to pay that price only if there is another collector that has my same taste and buying power. If eBay took my bid and forced me to pay something close to it, regardless of whether anyone else in the auction was bidding the price up, I’d quickly take my money elsewhere or I’d severely cut my original bid. If I think the auction is not operating honestly for one item, how am I to know what other item prices they may be manipulating?
For RTB to develop, demand needs to form naturally. There needs to be a fair market. Look at paid search advertising. Even early on, it priced bids by market value. With few advertisers, buyers got major key words for mere cents. Google waited for the market to take hold. That patience paid off as Google now operates one of the largest and most successful marketplaces. If advertisers didn’t trust the fairness of paid search, they would have been conservative with their budgets and growth wouldn’t have been what it was. This is what display advertising faces if dynamic pricing is forced on advertisers. Buyers should take a stand. They can and should vote with their budgets. If anything, the practice should be fully transparent, disclosed upfront and more discussions have to come out of this topic. If markets are fair and demand brings more budgets, prices go up. If we don’t get to that point and if we manipulate the market randomly, no one wins.
My ultimate issue – you can’t call it an auction if you’re manipulating the clear price, and we need to do something about that.