Understanding Online Ads: The Complete Guide to Ad Auction

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 You see advertisements everywhere you go. You visit your favourite news site to keep up with the latest market trends and see a flashy pop-up ad for a new smartphone. And every time you log into your Facebook account, the pair of shoes you’ve always had your eyes on is the first thing that you see. 

But do you ever wonder how these ads randomly show up on your browser? How do advertisers find the target audience for their ads?

What’s interesting is that an ad auction takes place, determining which ads will show up in a user’s browser. It’s an indication that online advertising is an ever-evolving marketing form, from targeting options and automation to ad formats.

The era of online advertising is here, and the competition for search engine visibility is getting more intense as the years go by.  Find out how you can leverage this system and make your business thrive in the virtual world with our programmatic ads service!

What are Ad Auctions?

1. What are ad auctions

An ad auction is the pricing process that takes place in online advertising, typically on a pay-per-click basis. There will be various bids to place your advertisements in locations on the Internet bounded by advertisers. 

To get the most out of their revenues, publishers implement ad auctions. Every time this takes place, the ad decision engine will choose the ad that will yield the highest payoff. For example, if twenty advertisers bid for one ad slot, the advertiser who bids the highest will be selected by the ad server. 

How Ad Auction Work

When we talk about ad auctions in online advertising, keep in mind that prices are not fixed since it highly depends on supply and demand. Pricing is usually determined through a PPC auction where the price set is proportionate to the advertisers’ bid. 

This means that if you want to be ten steps ahead of your competitors, your bid must exceed the current bidder’s offer. 

Let’s discuss the Google Ads auction for example. When a user searches for something on the platform, the system will find all the ads related to the keyword or the context of that person’s search. However, ads that are not suitable for a reason won’t be displayed. 

This includes advertisements that target a different region or anything that violates Google policies. 

In this scenario, an ad can only be displayed if it has a high ad ranking. It is a combination of ad quality, ranking threshold and bid, among other factors. If you meet all the standards, then you will be the winner of the auction. 

However, if a competitor has a higher bid than you, you can still land a higher position at a much lower price using keywords and highly relevant ads. Just remember that various results may be shown in every auction depending on the competition. 

Ad Auction vs Ad Lottery: Which One Is Better?

Aside from ad auctions, another common method that publishers use is called the lottery. This is where ads are chosen randomly from qualified advertisers, regardless of their bidding amount. This is also called even rotation.

So, if you’re a publisher, which method perfectly suits your needs and commitments to your advertisers? Let’s discuss the considerations below.

For ad auctions, these are the things you need to assess:

  • Running ad auctions is ideal if you have more advertisers than inventory. For instance, five or more advertisers are vying for an ad slot. To generate higher revenue on your end, you can set up an auction to start a competition. 
  • If you want to offer a way for advertisers to set their bids, then this method is right up your street. In addition, this would also allow them to compete for more impressions through bidding, giving them better control of results. 

However, the lottery method might work best for you if:

  • Your inventory is bigger than the number of advertisers. Since a higher demand may result in a bidding war, the flipside can lead to a race-to-the-bottom kind of competition where advertisers can get an inventory at a low price. 

However, using the lottery method with fixed bids can guarantee that there’s a certain amount you generate. 

  • You want fixed bids. Things become complex when advertisers are given the chance to set their own bids, especially for a newly launched ad site. It will be much easier to manage the platform if you have fixed bids that undergo even rotation. 

Simply put, you need to choose ad auctions if you want to maximise your earnings when demand is higher than supply. On the other hand, the lottery method is a better choice when you want to streamline your pricing model in terms of bid and volume amounts.

Types of Ad Auctions


animation of ad auction

Image source: https://setupad.com/

First-price auctions tend to be straightforward. This is a model where the buyer pays exactly the price they want to bid on any advertising slot. What you bid is what you pay.

For example, there are three advertisers or bidders:

  1. Bidder A – US$2.00
  2. Bidder B – US$2.50
  3. Bidder C – US$3.00

In this scenario, the winning bid is from Bidder C since it is the highest amount. Publishers often prefer this method since it is becoming more popular in the ad landscape. This is especially true when Google has decided to shift from second-price to first-price auctions. 


explanation of second price in ad auction

Image source: https://yieldbird.com/

The second-price auction is a model where the advertiser has to pay US$0.01 more than the second-highest bid. So, using the same example above, the winning bid still belongs to Bidder C. However, their clearing price will be the second-highest bid (US$2.50) + US$0.01 = US$2.51.

Most publishers prefer this model since it is more advertiser-friendly. They are not required to break the bank just for impressions. Besides, if your prices are affordable, it will result in better downstream metrics such as cost-per-action and cost-per-click. 

Second-price auctions also make bidding more truthful. Advertisers may try to rig the system via bid shading, especially when they know you do first-price. They would attempt to calculate the market price of the impression instead of bidding according to their budget.

But with second-price, bid shading will be avoided because the auction automatically sets the market value. 

The Difference Between First-Price and Second-Price Auctions

To understand the difference between first-price and second-price auctions, you have to learn the trading process. The advertisers want to save money as much as they can, while the publishers aim to generate higher rates. 

So, the difference between the two types of auctions is the clearing price—the final price paid for an impression. 

In second-price auctions, you’d typically notice a smaller amount of bids. Since the winning bidder will only pay scarcely more than the second-highest bidder, publishers tend to earn less. It also provides helpful insights about the competition and help you optimise future bids for ad inventories. 

On the other hand, first-price auctions give publishers better control over their profit even without the floor price. However, this type of ad auction do not get the same support that second-price does. It leads to longer loading times for users, preventing ads from generating more clicks and leads. 

How to Win in Ad Auctions

The best way to get started and make the most out of ad auctions is to make quality ads. For instance, if your chosen platform is Google, you have to remember that there are factors you need to consider—expected CTR, user experience and relevance to keyword. 

In most cases, it all boils down to how well-made your online ad is. When your advertisements catch the attention of users, you’re likely to win auctions and maximise ROI.

Here are some tips you can use to make better ads: 

Choose Your Target Audience

Always know who you are making the ad for. If you target the right market, customers will likely engage with your products and services. Because if you do the opposite and make your ad too general, you’ll get lost in the digital chaos. 

This is why you need to conduct market research. How old are your customers? How do they spend their time outside of work? Do they live in suburban or rural areas? That way, you can appeal to the right people and advertise what matters to them the most. 

Write Effective Calls to Action

Make sure that your ads have effective calls to action before participation in ad auctions! Keep the message brief and set expectations to let them know what their clicks will accomplish. 

For instance, instead of writing ‘Click Here’, you might want to change it to ‘Download the free template here’ to express value. 

Focus On Your Audience

One of the things why some online ads never rank or win in ad auctions is because they focus way too much on the sales talk. Instead of discussing how their products will solve problems, their strategies are focused on what the company wants to accomplish. 

Always focus on your target audience, no matter what. Tell them how your services can turn their lives around and add value to their routine. 

Final Thoughts

When it comes to winning ad auctions, you have to make sure that everything is balanced. You have to reach the right target audience who will perform your proposed actions while still spending within your budget. 

How do you exactly pull this off? The answer is creativity and proper planning. Your ads should catch the attention of users and inspire engagement while adhering to every rule. 

Because sometimes, it is never about your bidding amount. A quality ad will give you the upper hand in winning auctions and reduce your overall costs. If you’re ready to take a risk in the ever-growing ad technology, give our experts on ads management service a call!


What wins an ad auction?

To win in an ad auction, your ad should be the one with the highest total value. It is a combination of three major factors, which are the bid, estimated action rates and ad quality. 

What are the two types of auctions?

The two types of ad auctions are the first-price (what you bid is what you pay) and the second-price auctions (the winning bid pays US$0.01 more than the second-highest bid).

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Ian Ong
Marketing Director @ Roots Digital, a digital marketing agency in Singapore. Aka the guy responsible for growing the digital marketing agency.
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