Real-Time Bidding Essentials: How Bid Price and Frequency Cap Affect Session Depth and Impression Volume

by Ratko Vidakovic on January 16, 2013 · 3 comments

We find that many marketers are curious as to the inner working of buying display ads via real-time bidding (RTB) exchanges and demand-side platforms (DSPs) like SiteScout. Common questions include:

  • What is the cost of traffic?
  • What is the quality of traffic?
  • How much traffic is available?

It’s easier to answer these questions together since they are all inter-related. A deeper understanding of the mechanics behind the auction process is required to fully grasp the connections. And it’s also much easier to explain using an illustration.

The following graphic shows a fictional example of three advertisers competing for the same impressions from the same visitor. This example assumes that all the advertisers’ rules match this visitor.

(click to enlarge)

In this example, the visitor on a specific site views nine pages before leaving. The first page viewed by the visitor is considered the first impression. This is more often than not the home page, and is considered the lowest session depth. The more pages the visitors views, the higher (or deeper) they get into their session.

(NOTE: Normally the lowest session depths are sold directly to advertisers by publisher sales teams or by ad networks selling this inventory on their behalf. The RTB channel generally takes over the impressions that go unsold by direct deals, so the session depths are higher and typically unknown. This is why the “first” impression on RTB is not necessarily the homepage.)

RTB operates on a “second price” auction model, which means that each advertiser wins impressions sequentially at $0.01 higher than the next highest bidder. Pretty much like the Google AdWords auction process. Advertisers win as many impressions as their frequency cap dictates (for each individual visitor) before the next advertiser begins to win.

As you can see from the illustration above, the following rules hold true:

1. Advertisers with the highest bid prices will always have their ads served first. This means that the visitor viewing the ad will only receive ads from the next highest bidder once the frequency cap for the highest bidder has been exhausted. Corollary: the lowest bid prices will be served last, or not at all.

2. Higher bid prices result in lower session depths, as a result of having priority for their frequency caps. That means that if you have a frequency cap of 3 impressions per day, once your 3 impressions have been shown to a given visitor, the next highest bidder will begin to have their ads shown to that visitor. Corollary: lower bid prices result in higher session depths.

3. Higher bid prices also yield higher impression volumes, especially on sites where the average number of page views per user is low (e.g. 5 or lower). Corollary: Lower bid prices result in lower impression volumes, especially if a site’s visitors are known to only visit 3 pages per visit on average (for example) and the highest bidder has a frequency cap of 3 and loose targeting rules. The more page views (per visitor) that a site gets, the more “room” there will be for multiple advertisers to share the ad inventory. This is often found on sites such as forums, that have above average page views per user per visit.

In summary, frequency capping allows multiple buyers of the same inventory. Frequency caps are fulfilled sequentially, starting with the highest bidders. Therefore, higher bidders win lower session depths and higher volumes of traffic, while lower bidders win higher session depths and generally lower volumes of traffic. Thus, if you want the best quality inventory on RTB, and the most volume of impressions, bid high!

{ 3 comments… read them below or add one }

Gorkem January 28, 2013 at 2:33 pm

Great explanation.. Now everything is a bit more clear!

Thanks!

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Doru Catana February 14, 2013 at 7:30 am

if the audience the advertisers are competing for visits a lot of pages…wouldn’t having an “intermediate” bid bring the biggest value? basically keeping your competitor’s CPM with a high bid just bellow his maximum…then lowering your bid after he considers the campaign not profitable…

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Ratko Vidakovic February 27, 2013 at 1:40 pm

Yes, it could. Depending on the specific metrics of your campaign, you could potentially use more advanced bidding strategies, like you mentioned, to optimize your ROI. I tried to keep my example simple for educational purposes, but you’re right, you can definitely try more advanced strategies.

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