Bidding for the Win!
Auction-Based Advertising in Marketplaces

As digital advertising continues to evolve, so do the various models marketplaces, publishers and marketers enjoy for offering and buying advertising. Within industries such as automotive, real estate, and others, where the lead is king and purchases are considered over days, weeks, or months, publishers and marketers have most recently relied upon a traditional fixed-fee advertising model to monetize their listings and content.

In this article, we’ll discuss the growing availability of auction-based advertising, and how publishers, marketers, and consumers can benefit. Some things publishers should consider include, what is the potential value of your supply (advertising inventory or space); and what’s the level of demand – as in, how many advertisers are interested in reaching your consumer audience, and how will you enable and sustain a consistent marketing budget to flow in your direction?

With an analytical and strategic approach, publishers can maximize yield, drive increased advertiser performance, and meet consumers where they are on their decision journey. 


The Traditional Advertising Model

A common business model for publishers is to charge advertisers a fixed-cost fee that varies based on the number of listings they need, market prominence, and ad features within their marketplace. Sometimes this comes with a guarantee of placement, a set number of leads, or some other predetermined value in exchange for a fixed monthly fee. Predictable revenue is beneficial for publishers, and predictability is also beneficial for their advertisers.

If you’re offering promotion on a set basis like the formats mentioned above, and have multiple sellers who are paying for segmented promotion or leads on your marketplace, you have inherently priced the value of your offering in such a way that it is profitable for both parties. The evidence for that fact is that you’re willing to offer it, and they’re willing to buy it.

It’s easy to calculate the cost-per-lead (or per-conversion) on these approaches using historical data. For example, total revenue from all the ad deals, divided by total clicks to all advertisers, is the average cost-per-lead of the program. Whether you publish or calculate these figures or not, chances are your advertisers do it when they’re deciding whether to renew their ad program. It’s great to know what the metrics are that you’re currently generating with your program in order to determine how best to fit an ads program next to it.


The Auction Model

If the traditional models are a broad approach to advertising, then the auction-based model is a precision instrument. Unlike the fixed placement deals of history, the next generation of ads are dynamically priced in real-time CPC auctions that allocate clicks to the highest, or most relevant bidder in each auction. That means there is not a fixed pool of revenue or clicks to divvy up, but instead a set number of impressions (i.e. visits), which are priced according to demand. 

This can be tricky for publishers to trust, as it introduces variability which is counter to the positive factors that the predictability of a traditional ad approach gives advertisers and publishers. However, dynamic pricing offers much stronger performance in a different dimension: the ability to optimize supply and demand closest to the point of maximum profit for each advertiser, and for the publisher. With dynamic pricing, we are more closely able to match supply and demand and learn the value of each click or lead. 

Once this has been established, it becomes very possible to set bids and budgets that keep each advertiser in the zone of volume and profit they want each month (or week, or quarter), so as to deliver a relatively predictable level of investment and return. Similarly, publishers’ revenue stabilizes as demand volume grows at a level of revenue-per-impression (CPM) that is efficient for the marketplace. 

Since an auction-based ad system can well replicate the predictability of the traditional model, while introducing a more efficient allocation of supply and demand, it stands to reason that publishers and advertisers are not losing anything by moving to a dynamic CPC auction model. In fact, they’re likely gaining. The question then becomes, how to introduce the auction model in an existing ad business without disrupting the revenue from fixed-fee placements.


Working in Tandem

There are many nuances to effectively navigating the addition of an auction-based advertising model, and each marketplace bears careful examination of particular dynamics. That said, the general approach detailed below can work for any marketplace.

Step One
The first step is to create the ad auction system to replace the traditional promotion system. This means allocating inventory (some or all) to dynamic pricing and away from fixed pricing. Advertisers need to be able to set bids, budgets, and targets for the auction system, even though at the beginning of the transition, the publisher will be setting all of those on behalf of the advertisers (more below.)


Step Two
Second, the existing advertiser base needs to be given credits to use in the auction system according to some relationship-based projection. For example, platinum advertisers may get more credits than bronze advertisers, or top-of-page placements may get enough credits to guarantee that they stay at the top during the time they purchase their advertisement(s). This part is tricky, but doable – and with calculation and planning each placement can be calculated nearly exactly.


Step Three
Third, the auction system starts with only fixed placements participating, and only with the credits they were given. This allows the publisher to calibrate the credits and the auction such that the end result in terms of CPL, number of leads or clicks, etc., are as close as possible to the expected business’ metrics. Some tuning of the auction functionality over a few months’ time might be required.

Note that the traditional advertisers themselves do not need to know that any of this is going on, as their end result is exactly the same as it was under the traditional model. Think of this activity as internal testing and deployment of a new fixed placement back end.


Step Four
Once the traditional advertising model has been replicated with a dynamic auction, the final step is to open the dynamic auction to both additional money from traditional advertisers, and new participants. It behooves publishers to pre-announce this event so that traditional advertisers can plan for and react to it.

In an ideal scenario, the opening of dynamic pricing would cause advertisers  to kick in incremental budgets (above and beyond their fixed placements) in order to get more leads or clicks. This raises the revenue for publishers and drives incremental return for advertisers.


Additionally, the targeting and campaign options in the system can be opened to fixed-fee advertisers, so that they can target the types of traffic they want and exclude the types they do not. For example, an advertiser might choose to use all of their monthly credits on new customers, accepting the likely higher cost in return for the higher incrementality. Another advertiser might choose to target a different high-value customer profile, such as an inactive customer. This shaping of demand helps everyone get more from your marketplace vs. simple flat-rate pricing and targeting. Strategies emerge to help everyone hone in on their most valuable approaches.

Once this process concludes, one might expect that fixed-fee placements are offered as an option (with a preset number of ad credits per month, perhaps) right alongside the ad system, and that over time, advertisers will migrate to the ads system, while investing perhaps even more than they were  in the fixed-fee business because of the increased return on investment. 

Your ultimate goal should be maximizing yield and providing a best-in-class experience for consumers and advertisers. 


Wrapping Up

In conclusion, auction-based ad serving is the innovative advertising solution publishers and marketers are looking for. Since the auction process occurs for every single search query, filter update, page flip, and swipe, each individual auction can hold great potential in terms of results, reach, and performance. 

Koddi is the only adtech provider offering both auction-based ad serving and dynamic targeting capabilities – a feature which stands to make a massive impact for a native ad program’s bottom line. With the ability to provide personalization that’s precisely aligned with the consumer journey, Koddi’s ad platform ensures relevant and timely consumer ad experiences, unparalleled brand alignment, and the chance to drive incremental revenue in a bold, innovative way.

Give the team a shout to discuss our audience and auction solutions for your marketplace today!