The Ins and Outs of Bid Shading

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Bid shading is a cost-saving technology that has become increasingly commonplace alongside first-price auctions. That said, it’s still a new technology and something we’re frequently asked about – especially as it relates to managing the trade-off between average prices paid and win rates.

What Is Bid Shading?

Bid shading is a buy-side technology that, when enabled, uses an algorithm to automatically reduce bids in first-price auctions. This helps buyers save money and avoid overpaying for impressions. Thus, there’s a pervasive theory in ad tech that, as more publishers and exchanges move to first-price auctions, it’s always better to shade as aggressively as possible. As a result, many platforms have adopted a one-size-fits-all “universal” bid-shading switch in their UI. This unilateral approach to bid shading forces buyers into a binary scenario between choosing to prioritize cutting costs or maximizing delivery when, in reality, the amount of shading that buyers should do is directly correlated with the results they are trying to achieve.

How Does Bid Shading Work?

Bid shading algorithms sit on top of programmatic footprints and collect pricing information about won and lost impressions. This includes average price at a placement level, and other data such as day part, device, OS, above-/below-the-fold inventory, ad size, and other variables available in programmatic environments.

Using that data, these algorithms observe and predict pricing based on circumstances regarding the absence or presence of various factors with the goal of bidding as close to the “true value” of the impression as possible. However, it’s important to keep in mind that lowering bid prices also lowers overall chances to win impressions, hence the trade-off.

Should I Bid Shade?

It depends – the more you shade, the greater the chances of losing a given auction. However, bid shading can lead to substantial cost savings and significantly more efficient media spend compared to manually clear-cutting CPMs across the board. In most circumstances, this trade-off between savings and win rate is worth it, especially if your platform of choice provides controls over the bid shading algorithm to allow for situational strategies.

What Are Strategies for Bid Shading?

Some solutions enable users to choose how aggressively to bid shade, e.g., enabling users to shade more aggressively and prioritize bidding lower to increase savings and vice versa, shading less aggressively to allow for some cost saving, but not to the point where it drastically affects win rates. As such, how much to bid shade depends on several factors.

To simplify, I created a chart below. In general, line items with narrow audiences might run into delivery issues if shaded too aggressively; conversely, broad targeting can handle more aggressive shading without risking under-delivery. From a KPI standpoint, performance-based campaigns (particularly those with flexible budgets) can shade more aggressively whereas brand and/or reach campaigns may not want to risk missing out on impressions that would limit overall campaign visibility.

Campaign Targeting
Loose Moderate Strict
KPI Type Performance Aggressive Aggressive Moderate
Brand Aggressive Moderate Light
Reach Moderate Light Off

What Are Some Examples of Bid Shading?

Here are some campaign examples:

  1. A mass-market campaign with a strict performance goal and lots of available inventory (e.g., a blended cross-device CPA campaign for an e-retailer) can probably shade more aggressively. Inventory is plentiful and it’s okay to lose a few bids to reduce inventory cost and maximize campaign KPI performance.
  2. A political advertising campaign to reach a very specific audience in a tight geo on a short timeline should prioritize delivery. Since ad fulfillment opportunities are scarcer, buyers may only want to shade the most expensive bids or avoid bid shading entirely.

Ultimately, the best approach to bid shading really depends on your goals and risk tolerance. If you’ve got plenty of time and a large audience, there’s no reason not to try and save as much as possible. If you’re on a deadline, need to deliver, and are okay with paying a premium, a bit of bid shading can still help reach goals while saving costs. In either scenario, as long as you’re in control, you’ll be able to save and increase media efficiency. And for everything else in between, there’s the Goldilocks approach – using bid shading to strike a nice balance between minimizing prices paid while maximizing win rate.

To learn more about bid shading with FreeWheel, connect with one of our experts.