Bid shading is losing favor with wary advertisers

Savvy advertisers are starting to question the legitimacy of bid shading.

Bid shading was devised by DSPs to help media agency buyers accustomed to second-price auctions more easily stomach paying the higher prices required to win bids in a first-price auction. To achieve it, ad tech vendors use bid shading tech to calculate a price for buyers that sits somewhere between first and second price.

Buyers have jumped on bid shading ever since its arrival in 2017 because it gave them an edge in first-price auctions as they could secure cheaper CPMs and avoid the risk of overpaying for ads. But as with most quick-fix, ad-tech solutions there are drawbacks, which certain advertisers have wised up to, according to ad tech executives.

“There’s concern among advertisers that ad tech vendors could be using bid shading to take a margin from their ad spend based on the contribution that can’t be proven,” said Jochen Schlosser, chief strategy officer at ad tech vendor Adform. “It’s only the very mature advertisers that are asking us about bid shading, and when they do, they know more about the business model behind it.”

Some ad tech vendors wrap their bid shading algorithms up in complicated pricing structures in order to take a larger cut of media dollars, according to ad tech and agency sources. For example, rather than take a standard 10% cut from bids that are won using bid shading, vendors can charge a higher margin without the advertisers’ knowing the bid-clearing price. It’s effectively another hidden fee for advertisers. Ad tech vendors often use their own proprietary bid shading technology and tend to not want to disclose their internal pricing mechanics as well as prediction capabilities. Those vendors may also be reluctant to provide full transparency into the traffic that they’re buying and how it’s treated, said Joe Were, head of business development, EMEA for ad tech developer Iponweb.

Only a few advertisers spending large sums on programmatic have the know-how to get full transparency into how ad tech innovations like bid shading make a profit. But Google’s shift to first-price auctions has pushed more advertisers and their agencies to demand, evaluate and adopt bid-shading technologies, according to ad tech sources interviewed for this article.

“The marketers we work with don’t know how to feel about bid shading,” said Chris Kane, founder of programmatic consultancy Jounce Media. “They recognize the value that comes with using the technology, but they’re also fearful of the risk they could be exposed to as a result of some of the black box models around the technology.”

Advertisers that talk directly to ad tech firms are a small but growing group. And as real as their interest in bid shading is, the tech is still not a big priority for many advertisers still getting to grips with programmatic. The more advertisers understand how their ad tech works, whether that’s from consolidating their DSPs like Hershey’s or by conducting their own audits like Deutsche Telekom, the more they realize taking on something as complicated as bid shading could be a step too far.

“Moving forward with bid shading could ultimately work out better for brands because it’s probably going to mean they are buying media cheaper than they were without it,” said Dan Larden, Infectious Media’s global strategic partnerships director. “The issue is, there tends to be hidden fees attached to those bid shading models that brands don’t always know about without some investigation.”

When Hershey’s looked for a main DSP vendor last year, for example, bid shading wasn’t high on the list of must-haves for the advertiser. Transparent fees were, however, as Hershey’s head of addressable media Vincent Rinaldi wanted a clear starting point for how it ascribed value to its programmatic investments. Eventually, Rinaldi’s focus will move beyond tech fees given he has already acknowledged there’s a long list of factors such as auction latency and DSP match rates that influence the performance of its bids alongside price. Google’s switch to first price auctions hasn’t caused any major deviations from that plan.

One ad tech executive, who spoke to Digiday on condition of anonymity, has prodded the advertisers they work with to question their agencies on their approach to bid shading, or advised them to pursue a direct relationship with a DSP to find out. Bid shading isn’t top of mind for the ad tech executive’s clients who primarily view it as a tool used by DSPs to push back against the attempts by publishers and SSPs to inflate the lowest price at which an ad can be sold within first-price auctions, said the executive.

In short, bid shading isn’t much more than a short-term fix to help advertisers better understand the dynamics at play in their programmatic auctions.

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