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New insights into real-time bidding

Chris Kane
New insights into real-time bidding Chris Kane

Real-time bidding (RTB) is emerging as a highly efficient alternative to traditional network display advertising, but success in the RTB marketplace requires advertisers to re-wire the way they buy media. Dynamic pricing and precise audience targeting require new skill sets, new partnerships, and new measurement systems. The sophisticated RTB buyer now thinks about the value of each impression and looks for pockets of inefficiency, snapping up impressions that are priced below their value and passing on the rest. So is this mind-shift worth the effort? Is being a sophisticated RTB advertiser a worthwhile differentiator?

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RTB price efficiency
The ability to submit dynamic bids (a different bid for each impression) and price reduce (pay the second auction price) creates significant advantages for advertisers versus traditional network buys. Under a traditional pricing structure, an advertiser pays a flat price for every impression. If Advertiser A agrees to pay a $4.00 CPM to reach its target audience, then it is billed $4.00 for every thousand impressions delivered. This has two important effects: First, impressions that might be won in an auction for $1.00 would be charged back at $4.00. Second, any impression that Advertiser B is willing to buy for more than $4.00 would not be available to Advertiser A. RTB, by contrast, allows advertisers to submit a different bid for each impression based on that impression's expected value. The winning bidder is then often awarded the impression at a price below its bid -- typically the price offered by the second-highest bidder. In this example, Advertiser A would win some impressions for $4.00, but also many impressions below $4.00. The savings on those low-cost impressions can fund more expensive impressions. Each time Advertiser A wins an impression for $1.00, $3.00 is available to be used for other impressions. This allows Advertiser A to bid up to $7.00 on the next impression.

All-in, the results are significant. Consider the chart below, which shows the pricing curve for a sample of 200 million display impressions. The data reflects a combination of many advertisers targeting diverse audiences across multiple inventory sources. Some impressions cost less than $0.05 CPM, while others were won for more than $20.00 CPM -- rates comparable to primetime television. The red line represents a dynamic RTB pricing structure (pay the market price for each impression), and the blue line represents a traditional network pricing structure (pay a flat price for all impressions.) In order to win half of the available impressions, the RTB cost would be $0.20 CPM versus $0.47 under a network structure -- a 59 percent savings. Conversely, for the same $0.47 effective CPM, the advertiser is able to win 52 percent more impressions under an RTB structure.

As attractive as these dynamics are to advertisers, a significant concern is whether there is sufficient scale available in the RTB marketplace. RTB is still young, but volume has tripled in the last six months, and industry pundits project that RTB will account for up to 50 percent of display and video inventory by 2012. Regardless of absolute volume, the key metrics that matter for advertisers are the reach and frequency that they can achieve among their target audiences. RTB is already delivering against these metrics, with near-100 percent penetration of North American consumers.

Consider the following highly customized audiences that were recently targeted by five RTB advertisers: in-market auto intenders, recent home movers, online food delivery buyers, insurance shoppers, and first-time investors. These audience sizes ranged from 300,000 to 1.5 million unique users. Impressively, RTB inventory was able to achieve 75 percent penetration of these audiences over a 30-day period. A sophisticated demand-side platform (DSP) can then leverage similar targeting strategies to reach the remaining 25 percent of these audiences via non-bidded inventory. RTB inventory was also able to achieve significant frequencies across these target audiences. Among users reached, 75 percent could be reached for a second impression, and more than 50 percent could be reached 12 or more times over the 30-day period.

RTB's role
There will continue to be premium content that is only accessible via direct guaranteed buys, and this inventory will continue to be an important backbone for many online advertisers. But the efficiency and scale of the biddable marketplace are compelling, and RTB will increasingly become the primary way that advertisers access non-guaranteed inventory. Sophisticated media planners already treat RTB as a key component of any major campaign, as developing a winning strategy now will pay dividends as auction-based inventory growth continues to accelerate.
Chris Kane is an account strategist at Turn.

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