If press coverage and major ad tech conference agendas are any indication, Supply Path Optimization, or SPO for short, is one of the hottest topics in ad tech.
But SPO means different things to different people at different times. In an attempt to demystify Supply Path Optimization, and highlight its recent popularity and most promising use cases, let’s go back to the beginning.
SUPPLY PATH FRAGMENTATION IS NOT NEW
SPO relates to the multitude of supply paths that an impression opportunity can take on its way from the publisher to the DSP. Even though the topic has become critical lately, due in part to the rapid adoption of header bidding, fragmentation in the supply path has existed since programmatic’s early days.
A common misconception at the start of programmatic was that the buying and selling of media was going to work like an ad exchange that provided “seats” to buyers and sellers that used the exchange to transact, like the simple market below:
What we got, though, looked more like the complex market
BUYER BID STRATEGY IN A SIMPLE MARKET:
In an efficient market, it is widely accepted that the optimal transaction mechanic between a buyer and seller is the second-price auction, popularized by the Vickrey or Generalized Second Price auctions and made famous by Google Search auctions.
The second-price market incentivizes buyers to bid their true value for any given good. The true value should be close to a buyer’s “willingness to pay,” or the max price that buyer would be willing to pay for that good. Because the buyer will never pay more for the good than his or her buying competitor is “willing to pay” the second-price auction transacts goods at a fair price, leaving the buyer without remorse from the transaction and willing to participate again.
In a DSP, this bid strategy can be represented well by bid multipliers or a probability function that calculates the probability that a certain impression opportunity will lead to a conversion event multiplied by the buyer’s willingness to pay for that conversion event, like a $50 CPA.
In a first-price market, a buyer bids his true “willingness to pay,” and, should he win, pays what he agreed to bid. In this case, he may experience buyer’s remorse if he feels he could have offered less and still won the auction. The optimal bid strategy for a buyer in this situation is to understand his willingness to pay but to shade that bid and bid something else based on either guesswork or sophisticated modeling of what he thinks the competition will be willing to pay for the good.
For a once-in-a-lifetime good, a modeled 1st price bid strategy obviously won’t work. But for multiple (of the same) goods being sold via first-price auction mechanics in sequential auctions, the buyer has the luxury of multiple future attempts to understand his or her willingness to pay, evaluate the need for that good right now vs. sometime in the future, and predict the expected market clearing price for a future given opportunity.
THE SECOND PRICE UNICORN:
Many SSPs declare second-price exchanges as their auction mechanic methodology. This is mostly true, but the second-price can sometimes be augmented, in some cases explicitly by the SSP (such as buy-side fees), and, in other cases, naively by market conditions (as happens when an impression opportunity is duplicated by a publisher across SSPs, pushing the actual transaction closer to first-price).
In the current state of ad exchanges, there is no such thing as a second-price auction. There are many yield management tactics that are deployed by publishers and intermediaries to increase the clearing price, which in -turn create a fragmented and duplicated market. What follows is a list of some of the most common tactics contributing to where we are today.
COMMON BUY-SIDE AND SELL-SIDE TACTICS IN A COMPLEX MARKET:
Since the early days of programmatic, many DSPs have been unwilling to submit all advertiser bids for any given auction to an SSP. The DSP will instead hold an internal auction before submitting to the external auction. When the DSP withholds bids from the external auction, they are acting like a pricing cartel, deflating demand and incenting the sellers to extract demand and price through other trading methods.
Publisher Ad Server Daisy Chaining
Publisher’s daisy-chain sources of demand, including SSPs and ad networks, in their ad server. Each source of demand is given a floor price, and an impression opportunity falls down the daisy chain (also called waterfall) with different floor prices until it is eventually picked up. In a daisy chain, an impression opportunity can be made available between 1 and up to 6 times, depending on how long it takes to get purchased.
Publisher Header Bidding
With the adoption of header bidding, an impression opportunity can now be seen first in the header and then subsequently in Google AdX and/or the publisher’s daisy chain. When a publisher uses a header tag with multiple SSPs, the header creates duplication on its own but, once the header auction is resolved, the impression is still present in Google AdX and then again in the publisher daisy chain if floors aren’t met. The net effect is that some impression opportunities are now duplicated by a factor of 5-30x thanks to header bidding adoption.
In some cases, publishers will contract with resellers to extract additional yield and bid density from the market. These network resellers typically have access to unique demand that sits outside the SSPs. They might also engage in tactics like format arbitrage, as happens when resellers receive a display impression from a publisher and attempt to re-sell it as a video impression at a higher price (in which case, the video ad is wrapped in a video player and inserted into the display ad slot).
In tactics similar to authorized reselling, some intermediaries will harvest demand from multiple sources and arbitrage market inefficiencies like network latency and UUID syncing to fill a publishers supply from any source of demand. The key difference is that the unauthorized reseller has not contracted with the publisher or advertiser. The publisher still receives higher yield than they would have had the unauthorized reseller not sold their inventory, but the unauthorized reseller has also taken a fee and compounded the ad tech tax.
SSP-Directed Bid Duplication
SSPs will increase their yield by farming out publisher calls to alternate sources of demand, like other SSPs that have agreed to help each other duplicate and underwrite publisher supply.
As an antidote to the DSPs’ withholding bids, some SSPs will ping the same DSP multiple times for the same ad impression in order to extract higher bid density from the DSP.
SSP Bid Tiering
Bid tiering is a form of SSP Directed Re-solicitation. In this form the SSP sends the same request to the same DSP with different price floors. This tactic offers some form of price reduction as it can still contractually be defined as a 2nd price auction but the end result is closer to a 1st price auction.
SSP-Declared 1st- or 2nd-Price Auction Dynamics
Announcements around auction type declaration by OpenX, AppNexus and Rubicon now present DSPs with information they need to make a more informed decision on how to bid for the two types of exchanges that these SSPs now support. Some of the declared first-price auctions have some sort of price reduction built in depending on the given auction from the SSP (and others do not), making it very difficult for DSPs to understand the true value of any impression opportunity they’re bidding on.
TOOLS TO OPTIMIZE FOR SUPPLY PATH FRAGMENTATION:
The backdrop created by these buying and selling yield tactics has long supported a fragmented market position. Any method to treat this fragmented market generally falls under the phrase Supply Path Optimization. The most common of those treatments are explained below.
Bid Stream Reduction
This treatment involves blocking undesired supply paths either through manual heuristic blocking, SSP-side filtering, early exit, or through a 3rd party bid-shaping technology. When executed well, a DSP should be able to effectively reduce the bids they are listening to without harming its ability to spend campaign budgets. When executed poorly, the DSP will miss out on impression opportunities they should have otherwise tried to purchase.
Fair Price Discovery
This is a buying strategy that modifies a bid response designed to work in a second-price auction to work for a fragmented market or first-price auction. These systems are designed to help the DSP pay a fair price for a given impression opportunity that is either a declared first-price auction or an unknown auction due to fragmentation.
Header Bidding Fill Rate Improvement
A common problem in header bidding is that many auctions are cleared as second-price in the header but don’t win in the ad server, thereby suppressing publisher yield. Consider this scenario:
Ads.txt is an IAB-backed policing tactic that lets publishers announce the supply players (networks, SSPs, etc.) they have authorized to resell their inventory to DSPs, so they can determine if they are buying that inventory through legitimate channels or not.
Bid Flattening to remove the ad tech tax
This DSP bid strategy identifies the supply path of a given impression and, depending on the DSP’s need for that impression at the given time, enables the DSP to bid the same amount for the given impression across multiple supply paths. This method prevents the DSP from overpaying on any given supply path. All else being equal, the supply path that extracts the lowest ad-tech tax will win the auction, as that path should be able to present the highest bid to the publisher.
There is a naive approaches to SPO that shut down given supply paths for the purpose of selecting low fee paths but this approach is dangerous. It trades off price at the expense of value as it ignores the dynamic and interwoven nature of a the supply path engineered to maximize publisher yield.
I'd recommend that the best approaches to tackle supply path fragmentation are contained in how the buyer chooses when they bid and how to bid instead of which path to turn off or turn on. In order to build an effective solution all the supply side tactics mentioned above need to be addressed. This function falls squarely into the overlooked field of buyer bid strategy that to date has been outsourced to DSPs with almost no buyer scrutiny or even understanding into how this function is handled within a DSP. I believe it is time for this to change and for buyers to own their own bid strategy that drive to their own KPIs.
I also believe that buyers will begin to focus on value over price and as they do the brands and agencies that can best control their bid strategy either within or across DSPs will yield the biggest gains. I believe it is time for the buy side principals to engage and control their own optimization and bid strategy to maximize outcomes on their behalf.
This category is one of my favorite topics. I'd love to hear additional ideas and suggestions from other people who are passionate about the topic.
I'm also happy to add any definitions or tactics that are not covered and I will republish and give you credit.