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If there is one thing that has changed the landscape of modern advertising, it’s real-time bidding (RTB). It’s a concept that’s been in use for some time in search marketing where advertisers are competing against each other for the best ad positions on search engines. Actually, it’s the display ad space where real-time bidding has truly grown.

As with the majority of online marketing jargon that’s shortened into abbreviations or presented in a strictly technical sense, there’s a bit of confusion as to what RTB really is. You probably know that it’s effective, as everyone practically screams that very adjective at every mention of real-time bidding, but that’s about it. We’ll use this opportunity to guide you through it and tell you all you need to know about RTB.

The Basics

Real-time bidding is a process that enables buying and selling ad inventory on a per-impression basis through real-time auction. This happens almost instantaneously before the website loads, settling matters in real-time. However, before we get into the nitty-gritty of RTB, there’s one important distinction to make that causes big-time confusion. RTB is not the same as programmatic advertising. It is a form of programmatic advertising, but not every programmatic advertising relies on real-time bidding. In a way, RTB is taking the programmatic method a step forward.

Now that we’ve sorted that out, let’s get on to the business at hand, pronto.

The Players

As with any advertising interaction, there are at least two sides at work here. On the buying side, advertisers usually enlist a DSP (demand-side platform) that automates the entire process on their behalf. It helps advertisers decide which ad impressions to buy and how much to bid on them, based on a number of different parameters.

On the other part of the spectrum are publishers, representing the selling side in the overall scheme. They offer their inventory up for sale, often utilizing SSPs (supply-side platforms) for more efficient management and to maximize the price tag of their impressions. Both sides are similar, yet on opposite sides with ad exchanges being in the middle, acting as a mediator. Ad exchange is a software tool that facilitates the buy-sell process in real-time through, you guessed it – auctions.

The Process

Everything starts with a user visiting a certain website. An ad impression loads on it and sets off a bid request that may include different types of information: the page being loaded, user behavior, demographics, location, and so on. The request goes from the publisher to an ad exchange, which acknowledges it and submits it hand in hand with the accompanying data to multiple advertisers. They, in turn, automatically bid in real-time to place their ads with maximum bids and budgets for their ad campaigns set beforehand. The entire process is fairly straightforward, with the first impression being awarded to the highest bidder, the second to the second-highest bidder, the third to… You get the picture. For every ad slot on the page, there’s a new round of bidding and the process repeats. The price of impressions is based on what buyers are willing to pay and is determined in real-time, thus the name. The selling price is the maximum price that reflects the market demand.

How real-time bidding works

Source: Omnicore

So, every time someone sees an ad, it counts as one impression per location. For instance, one first page side banner ad counts as the first impression for that specific ad position. The second page would count as a second impression, irrelevant of the ad itself, and the cycle goes on. What’s interesting is that the difference between the highest and second highest bid can be $0.01. Let’s say advertiser A bids $1.50 while advertiser B bids $2.00 for CPM (cost per 1000 impressions) with a specified frequency cap (the maximum number of times each visitor sees an ad within 24 hours). The highest bid determines the winner (advertiser B), as well as the fractionally higher price at which the auction is cleared. The exact value depends on the platform, but it’s just a teensy-weensy bit more than the second-highest price offered – $1.50 plus a tiny fee, usually one cent. This means that in our case, advertiser B wins the bidding with $1.51 and doesn’t overpay in the end.

One notable term that needs to be mentioned is a price floor. In a case of a large gap between the first two bids, actual revenue, as opposed to potential revenue, is at serious risk. Hence, publishers set a price floor, a minimum price that the publisher will accept in order to create an equilibrium. The danger here for publishers is either overvaluing or undervaluing their inventory by setting price floors too high or low, which ultimately directly impacts their revenue.

Why RTB Is Beneficial

Inner machinations aside, real-time bidding is mutually beneficial for both the buying and selling side. For advertisers, it’s all about efficiency. They no longer have to deal with publishers or ad networks directly and go through the whole process of negotiating prices. By using ad exchanges and sometimes ad networks as well, advertisers have access to a wide array of inventory across a plethora of websites, free to pick those impressions they find most valuable. This results in more focused targeting and more efficient spending, as there are zero wasted impressions.

Thanks to real-time bidding, publishers can enjoy higher revenues for their inventory, since impressions offer a more narrowed targeting so the spend increases. Hence, buyers pay the maximum price for impressions and all is well. The situation is further beneficial to publishers because they get to uphold price floors and offer their inventory for auction, safe in the knowledge that a reserve price will be met in order for the auction to go through.

One more thing and we’re done. As it is often the case with online advertising, fraud is an ever-present issue, unfortunately. With that in mind, all your gained knowledge of RTB will be of little importance if you don’t use only trusted platforms, exchanges, and programs. Don’t say we didn’t warn you.