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Leading delivery app Glovo launches their dream media ads platform and easily scales up to 40x vendors in 3 months with custom-built tools and features from Topsort.
How Auction-powered Sponsored Listings Grew into a Pillar of Profitability for Amazon
How a 15M GMV Chilean Baby E-Commerce Site Used Promoted Listings for Cyber Monday
Julián Mayorca
Global Head of Monetization at Rappi
See how the biggest marketplaces, delivery apps, and retailers launched their monetization journeys with Topsort’s APIs
and tools
Keep up with the industry with our original articles about the auctions based advertising, marketplaces, monetization tech, and native media and more!
March 24, 2023
Marketplace and vendor level metrics all in one place for easier comparison and real-time data analytics
We are excited to announce the Analytics tab for those of you wanting more real-time insights and deeper analytics of their ad businesses.
Performance monitoring is a crucial part of ad business management. In addition to marketplace-level metrics, admins need a birds-eye view of vendor performances and want to be able to see how each of them is doing.
We already have very robust reporting and analytical features within the admin dashboard, but we heard that some of our partners were going through manual processes to better understand metrics.
We know that you want to have a clear understanding of how your ad platform is performing and what your vendors are doing, but sorting through data from multiple sources, exporting and importing vendor metrics, writing formulas, and making comparisons can be overwhelming.
Topsort's Analytics is a new section on the admin dashboard that provides you with the visibility you need to effectively manage your ad business. Topsort Analytics gives you insights on both marketplace and vendor levels.
At the marketplace level, you'll be able to see 10 key ad metrics to have insights about how your ad business is doing for any time frame you pick. You'll also be able to view trends for each metric by comparing them over any selected time period.
At the vendor level, you'll have a column list of all your vendors, with each row representing the vendor's ad metrics. Using the vendor analytics table, you'll be able to see how each vendor is performing, and make informed decisions to optimize your overall ad performance.
You can customize the vendor table to view to display the metrics you selected. If you still want to use another tool to analyze these numbers, you can still export all data. Customize the export file with the metrics that matters to you the most for any time period you want.
With Topsort's Analytics, you can say goodbye to the hassle of using multiple data analytics tools, and hello to the convenience of having everything you need in one place. Upgrade your ad management game with Topsort's Analytics today!
Do you want to see analytics tab and other Topsort features in action? Book a demo today!
March 8, 2023
We launched a new and improved banner ads experience with improvements in configuration, campaign creation, and targeting.
Topsort’s vision is to let you launch, scale, and optimize your ad platform on your terms, intelligently. We understand that each marketplace is unique and our ad formats can be configured to help you build an ad experience that fits perfectly into your business dynamics.
That doesn’t stop us from improving the experiences to give you stronger and more flexible tools.
We are excited to announce the launch of our new and improved banner ads experience. This revamp was driven by our commitment to providing you with a streamlined and intuitive platform to manage your banner ads.
We’d like to explain why we decided to redefine the banner ads experience for retail media in the first place. If you want to jump to the product update details, just scroll down a little bit.
Banner ads have been one of the most popular ad formats, but we can say they have been poorly used for decades and got notoriety because of cookie-based retargeting. With the rise of Retail Media banner ads, they seem to get their popularity back.
But the way banner ads have been being leveraged, created challenges for their use with retail media.
Sponsored listings as the core format of auction-based ads have been the gold mine for marketplaces because they are relevant and don’t bother the users.
Retail media banner ads, on the other hand, had the relevance issue. Category pages, search result pages, and other high-intent pages would benefit from relevant banners. But nobody likes to see the banner of “men’s boots” on the beachwear category page.
This can be managed by marketplace admins by manually checking each banner and advertiser, which brings us to scalability issues.
What about when you have hundreds of vendors and hundreds of categories? How can you ensure all banner ads are relevant? Let’s add banners on search result pages to make it more complicated.
How many people do you need in your management team to manage these thousands of variations?
And even if you do, how can you price a banner that shows up when people search for “Valentine's day gifts for wife” during a peak season vs a banner ad on the gifts category page on any random weekend?
Fixed prices can result in overpricing of the banners that result in unhappy vendors or underpricing that results in loss of ad revenue. And, this is the 3rd challenge with retail media banner ads.
Marketplaces, retailers, and delivery apps are dynamic businesses. Each vendor and brand have different goals and budgets. The snacks category becomes more valuable during the World Cup finals than on Monday afternoons. Just to make pricing more complicated, there are also brands who want to improve their visibility on certain pages by showing a banner for a whole month.
CPM, bids, or exclusive prices make the whole thing complicated. You might need a long spreadsheet to keep track of them. And don’t forget to report the results.
When we launched our banner ads format, we addressed all of these solutions by combining auction-based high-visibility and mobile-friendly banner ads with a fully-configurable workflow.
We turned a poorly used ad format into a premium offering.
From working with many marketplaces, retailers, and delivery apps, we’ve also learned that each business has different dynamics and wants to create a banner ads experience that fits their businesses.
They wanted more configuration with their retail media banner ads, easier management, and precise targeting. They also wanted to be able to have absolute control over their banner placements to offer exclusivity and fixed tenancy.
Our smoother and more coherent new banner ads experience comes with improvements in three core areas: Configuration, Campaign Creation, and Targeting
You can create banner ads for search, category, and landing pages. With these 3 types of banner placements, you can serve banner ads for the entire user journey on your website or app. Now, you don’t need to spend time with Search and Category page banner ad slots because we got them configured for you. There is just one slot for category pages, and one slot for search results pages.
Instead, you can define landing page placements, but faster.
Your homepage, and the other high-value and specific pages that act as landing pages are perfect for banner ads dueto their high traffic. Using our intuitive UI, you can define as many placements as your want, like adding new rows to a spreadsheet.
You can create banner slots for multiple landing pages and even multiple banners for a single page. At any point, you can delete a configuration or add a new one. If you have a long list of pages and banner slots, consider bulk uploading the configuration.
We added new entry points to the campaign creation flow and improved the flow by adding more features.
Now, as an admin, you can create banner ads campaigns directly on the configuration page. You can still visit the vendor page and launch a banner ads campaign. This new flow saves you time by letting you create banner ads campaigns for vendors (even multiple vendors) easily. You can promote a vendor, a product, or a URL.
For faster campaign creation, use the “Create Banner” button or pick a slot from the list. Now, for each banner ad slot, you can upload different creatives for mobile and desktop, or crop one image to fit both.
Before launching your campaign, you can set a maximum CPM or turn autobidding on to maximize the results. By adding bidding to the banner ads, you can let multiple brands and vendors compete for that spot; bringing your banner ads to their true value and boosting your revenues. Both for autobidding and maximum CPM, you can set different daily budgets per desktop and mobile.
On the Banner Ads Overview page, you can see all your configurations, as well as the performance of each slot. You can see the number of bids, impressions, and CPM for any date.
We implemented new targeting features to create a relevant experience for your visitors and premium ad formats for your vendors and brands. For landing page banners, the targeting is built in. By creating exclusive banner slots for each landing page, you are creating a premium placement for visitors to those pages. You can drive the traffic from banners to a product, vendor, or URL.
For category and search result pages, you can target certain categories, keywords, and locations. Combine these targeting options to create banner ads campaigns to reach your desired audience with precision.
One of the most common requests we were receiving from our partners was about the fixed tenancy. Brands and vendors like to be shown on a certain category or landing page. With our recent update, you can create exclusive banners with a click of a button. When marked as exclusive, that banner slot will only be available to the vendors you pick and others can not enter the auctions for that spot during the exclusivity period.
To make a banner exclusive, simply select Exclusive from “Bidding or Exclusive” dropdown on the last step of campaign creation and set the start and end dates of the exclusivity or tenancy period.
It’s time to leverage banner ads to give your brands and vendors a chance to promote their brands and products while boosting your ad revenue.
Have a question? Want to see our new banner ads flow in action? Let's talk
October 27, 2022
Apple explored the power, upside, and profitability of "sponsored search"
In early 2015, Apple was facing a major problem. According to its own internal documents, its existing mobile advertising offering, iAd, was not competitive, and the business model was flawed, with high costs due to the need to pay publishers and the challenges of handling user data to achieve accurate targeting while preserving user privacy.
Something needed to be done.
Apple considered two options. The first option was evolutionary – to redesign its existing iAd business with better infrastructure and expand it to other properties – Apple News, Pay, Maps, Siri, etc. The second option, however, was radically different. Under this option, Apple would gradually close down its iAd business, and instead launch a completely new business: Search Ads in App Store.
The idea behind this second option was (in hindsight!) very straightforward. When an iOS user opens App Store and searches for, say, a to-do list app, then in addition to “organic” results returned and sorted by the App Store search engine, he would also get a “sponsored” listing – an ad from an app developer who is interested in promoting its app to the user searching for to-do lists.
If the user then clicks on the ad, the user is taken to that app’s page in App Store, and the developer is charged by Apple for that click. If multiple developers indicated that they are interested in showing their ads to users searching for to-do lists (as is likely to be the case), then Apple’s system runs an auction among them, with those bidding higher more likely to be shown to the user.
This is, of course, the same idea as the one behind Google’s AdWords or Amazon’s Sponsored Listings, responsible for generating tens of billions of dollars in revenue (and profit, due to very high margins!) on both platforms. And it would have the same attractive features: high relevance for the users, reliance on clear user intent (instead of fragile and sensitive behavioral and demographic data), and the fact that after clicking on an ad, the user would remain on the original platform, instead of leaving it.
In Apple’s own words, Search Ads in App Store would “enable promoted discovery for developers,” be “a natural & highly profitable business for Apple,” and would have “relevance + bids create balance via algorithm.”
It wasn’t clear how successful it would be in the new setting. And Apple did not really have a lot of experience running sponsored search auctions – they would need to spend substantial resources to develop such a platform from scratch, with estimated costs of many tens of millions of dollars per year. But on the other hand, Apple’s internal projections indicated that this would be a highly profitable initiative, with estimated internal rate of return (IRR) of 86.4%.
And Google had just launched a similar initiative, Sponsored Apps in Play Store, just a few months earlier. So Apple went ahead with the “revolutionary” option – Search Ads in App Store.
After more than a year in development, Search Ads went live in October of 2016.
The results have been explosive. By 2021, Search Ads were making Apple an estimated $5 billion a year – by comparison, a company as popular as Snapchat had only made $4.1 billion from advertising that year.
As noted by one observer, "It's like Apple Search Ads has gone from playing in the minor leagues to winning the World Series in the span of half a year." And they are just getting started: according to estimates by the prominent investment bank Evercore, Apple’s annual advertising revenue to grow to $30 billion by 2026.
The meteoric rise of Apple’s Search Ads in App Store, echoing the earlier similar explosive successes of Google’s AdWords and Amazon’s Sponsored Products, once again reinforces the enormous power, upside, and profitability of a seemingly simple idea: Sponsored Search.
October 20, 2022
Key to breaking through marketplace monetization in uncertain times ahead
With the news of the decline in global venture funding and Sofbank’s posting record losses for its Vision Fund, Marketplaces and Retailers all around the world have a hard-to-ignore fear of recession these days.
For many experienced entrepreneurs and professionals who have lived through the dot-com bust or the ‘08 financial crisis, weathering a recession might not be new. Entrepreneurs and marketplace leaders may need to revisit strategies to tackle the challenges that come with recession.VCs and large corporations are already revisiting their strategies in the face of current marketing conditions. One of the biggest venture capital firms, Sequoia Capital, shared their “digital toolkit” to help the startups navigate the challenging times ahead.
Even in times of layoffs, and technical teams shrinking, we’ve seen that more and more companies are investing in monetization through offering native ads.
We took a closer look at the specific impact for marketplaces and ecommerce brands.
Over the years, the number of digital marketplaces grew rapidly and turned into highly valuable assets for retailers. With competition in the market, growth might have taken precedence over monetization for online marketplaces.
A significant decline in spending during an economic downturn creates challenges for marketplaces and retailers. While consumers will continue to buy the essentials–food, health, personal care, etcetera.–decline in discretionary spending is inevitable.
These behavioral changes push marketplaces towards changing their strategies towards focusing more on monetization, customer and seller loyalty, and growing market position.
Times of crisis also create the perfect conditions for the birth of new businesses. Marketplaces need to update their strategies to be well-prepared for the potential competition.
These crisis times are also an opportunity for expanding into new markets or new formats, however we believe that a marketplace needs to have a solid monetization strategy that works in recession times, before considering growth.
The times of putting growth, or hypergrowth, as the top priority are gone, simply because the market is not rewarding the aforementioned growth the same way it used to.
At its core, monetization is about increasing capital. Marketplaces need to find new strategies to stay profitable and competitive.
Similar to many other businesses, marketplaces should focus on profitability rather than growth until the magnitude of the slow down in the economy is clearer. That doesn’t mean a complete stop on growth spending, but more of a balanced growth strategy with a focus on improving profitability.
For marketplaces, the monetization models are limited, especially for the ones that are operational heavy. During this downturn, no matter what the business model is(subscription fees, commissions, listing fees, etc.), money flow needs to be optimized.
After embracing reality, it’s time to act. You do not have years to plan your next steps. You know the market and your business. Do what is needed to preserve cash, increase the cash flow, and cut unnecessary expenses. Profitability is the main focus, now!
The money you want to spend on the Superbowl Ads is better spent on increasing your employee, consumer, and vendor loyalty. Expensive sponsorship deals with Hollywood stars can wait.
While optimizing your current monetization strategy, look for new methods.
While looking for new monetization methods, avoid drastic changes or complete overhaul, unless your marketplace monetization strategy is clearly not robust enough to support you through the recession.
Instead, explore new methods that could easily fit in your current strategy.
Talk to your customers, vendors, industry experts, and discuss options internally. Study the quantitative and qualitative data to find a method that aligns with your vendors’ goals and enhances your customers’ experience.
Your focus is on growing profitability, but you are not alone in this game. As you’re looking to monetize in new ways, so are your vendors! Partner with them to find solutions that benefit both of you.
Help them to thrive in these times by giving them the tools to sell more on your platform. Adapt a close feedback loop with them and respond proactively to market changes together.
Monetization is as important for your vendors as it is for the marketplace.
Native ads are the perfect way to help your vendors sell more on your platform. In the form of sponsored listings and banner ads, they help your customers find relevant products and your vendors increase their sales.
Amazon’s +$30 billion dollar per year revenue from Amazon Ads shows the true potential of the native ads on a marketplace.
Increased revenue and profits are the 2 immediate benefits native ads can give a marketplace or an e-commerce platform. That makes native ads a powerful and flexible monetization lever; something you need during the current market.
Thankfully, Topsort offers a great monetization method for marketplaces of any size.
With Topsort’s API-first solution, you can build a high-revenue ad platform for your marketplace in just weeks.
We’ve combined our expertise in game theory and auction design with marketplace and vendor priorities to bring you the best auction-based advertisement infrastructure out there.
Your vendors can also create effective ads with little angst and more confidence using our intuitive UI.
Aug 24, 2022
As a retailer, are you doing everything you can to take a slice of the retail media pie?
Retail media is probably the biggest trend in retail this year and is expected to grow by 26% to $30bn in the next couple of months. Its prominence has only been pushed further by the announcement of the disappearance of third-party cookies by Chrome and other major browsers.
So, who is winning in the retail media world? Of course, we have to look at the pioneer of retail media: the giant that is Amazon. In 2021, Amazon brought in $31bn in ad revenue. To put that into perspective, Walmart, Amazon’s closest competitor in the retail media space brought in $2.1bn in ad revenue for the same year.
First of all, BCG estimated profit margins for advertising on retailers' own channels to be as high as 90%.
Secondly, you have to stay competitive. Your vendors and brands are selling across multiple sites, perhaps including Amazon. If every other retailer offers them the opportunity to promote their products and increase sales, then why should they stay with you?
Finally, retail media is a great source of first-party data about your customers and vendors, especially prominent as third-party data is so hard to come by. With all this in mind, as a retailer, how can you be a “winner of retail media” and take a slice of the cake?
As a retailer, there’s nothing worse than the fear of customers coming on your site and then clicking on an ad that takes them to a different site. Or, if your design team has worked so hard to build an aesthetic sight for a third-party ad to start advertising flip-flops with a flashing red and yellow banner. Retail media is different; all the advertising is done by your existing vendors, and the ad can be as simple as a well-designed “Sponsored” tag. Even better, the ads will only be placed in high areas of relevance. For example, if you’re browsing sunglasses, you might see a video product listing for a sunglasses ad.
Retail media platforms are tech-heavy. This is why so many retailers chose to partner with retail media providers like Topsort who have the infrastructure perfected. Omnichannel is the buzzword of the retail world at the moment and without retail media, there is no buzz. Selling and advertising across multiple channels, having a presence online and in-person, and of course, creating a relevant ad platform is a necessity to thrive in 2022 retail. As a retailer, you might have brick-and-mortar stores, but a profitable online store is a whole different business.
Retailers make their money by vendors paying to promote their products and listings, so, the easier your retail media platform is, the better! Some brands have specialist advertising teams that create campaigns full-time, but the midsized and smaller vendors do not. Advertising should be simple, intuitive, and available without embarking on a huge training program. Successful retail media platforms are offering vendors "free ad credits" to get started. This way, they can test out making campaigns, see the results and ROAS and put their own money in!
Pricing ads is hard. Correction, pricing optimally is near impossible. Why? Because dynamic market changes and fluctuations are too much to keep track of. Retail media platforms that price their ads based on vendor auctions have a much greater chance to exceed revenue expectations and save employee time! Retail media infrastructure with machine learning functionalities can assess these factors that influence prices within a fraction of a second and adjust accordingly for price optimization.
Data is of course at the forefront of advertising with retail media. Vendors want to track and see reporting of their campaigns to assess their ROAS and CTRs. Retailers want to track the progress of the overall platform and be able to zoom in to analyze the performance of individual brands, products and campaigns. Real-time reporting ensures transparency and ease of data extraction. It's also great in customer support to help out vendors in real-time. As third-party cookies are phased out, data is one of the most valuable sources on the internet. Retailers using retail media can learn from each campaign with hundreds of thousands of data points every day.
The buzz of retail media is still on its way up and the potential to get on board is huge. 65% of top US retailers have an existing media monetization program with many more in the pipeline. As digitalization and e-commerce continue to rise, and the share of the retail media pie starts to shrink, now is the time to launch your retail media offering.
Aug 3, 2022
Delivery apps are beginning to explore an incredibly lucrative monetization opportunity: advertising using sponsored listings!
Mobile delivery apps are a marvel of modern business and technology. Doordash, UberEats, and Grubhub give customers an unprecedented set of dining choices, while at the same time allowing restaurants to reach a wide consumer base. Delivery apps like Instacart and Drizly provide same-day delivery on a wide variety of items, from groceries and consumer-packaged goods to wine and other alcoholic beverages. And newcomers like Jokr, Gopuff, and Gorillas upped the ante by promising delivery in as little as 30 or sometimes even 15 minutes.
At the same time, while providing such attractive services to the consumers, these businesses face very challenging economics: delivering items to customers is a time-consuming, labor-intensive, and expensive process, while margins on many of the items are slim. In the words of Grubhub’s founder, Matt Maloney, food delivery “is and always will be a crummy business.” Such economics not only make it challenging for these companies to reach profitability, but also often lead to unhappy partners, who sometimes go as far as calling the apps a “necessary evil” and feeling that they are “being taken advantage of”. And the current macroeconomic conditions make life even more difficult for these apps: while the pandemic increased the demand for their services and boosted their popularity, the labor shortages require paying delivery workers even more and thus drive the businesses’ costs even higher.
So why are these companies valued so highly, and why are investors so enthusiastic about their futures? The answer is that they are sitting on (and beginning to explore) an incredibly lucrative monetization opportunity: advertising in general, and featured/sponsored listings in particular. UberEats unveiled their self-serve, cost-per-click sponsored listings platform in August of 2020. Doordash followed in October of 2021. Grubhub unveiled their own offering, and Matt Maloney (the founder) reinforced his view of the opportunity, saying that Grubhub’s advertising service will hold the key to its future profitability.
Being able to advertise on delivery apps is incredibly attractive to the restaurants and other sellers. They can reach consumers at the point of immediate intent, and are able to provide highly relevant and targeted ads. And consumers are especially likely to respond to such delivery app ads, given the relevance, and the fact that they may only see a few results at a time and may not have time or interest in scrolling through a long list of options
Being able to promote on such apps gives new entrants an opportunity to get noticed and discovered by potential customers - and lets these customers know about various choices that they otherwise would not have known about. Sellers advertising on these platforms often increase their sales by 15-30%, and each dollar spent on advertising often brings in ten to twenty dollars in sales. As a result, the demand from advertisers to promote their restaurants and products via sponsored listings is incredibly strong.
The results from rolling out these ad platforms are immediate and striking. In the words of Toby Espinosa, VP of ads at DoorDash, “We just launched these services and I think the thing we underestimated was the power of the demand.” Likewise, Uber’s revenue from ads is now in the hundreds of millions of dollars per year. Both platforms use auctions to determine which ads to show to the users, so as the demand from advertisers goes up, so do their bids in the auctions, and thus the platforms’ revenues.
We are just starting to see the rollout of these advertising platforms, but it is already clear that they are an incredibly powerful and profitable monetization tool, and that delivery apps are a perfect match for them. The apps that do not have them yet will follow suit soon - if your competitor is getting a major revenue stream from such a platform, and you do not, that’s a major (and quite possibly lethal) strategic disadvantage, as they will have more flexibility, e.g., in reducing commissions or attracting new sellers. In the words of Toby Espinosa (the VP of ads at DoorDash), “This is the holy grail of e-commerce advertising if we can get this right.”
Jul 29, 2022
70% of Google’s advertisers use autobidding. 80% of Pinterest’s cost-per-click revenue comes from autobidded campaign...
In the beginning, bidding in ad auctions was basic, done on a per-click basis, now, it has expanded to many other types and flavors: per-impression, per-action, per-purchase, per-like, and so on. Advertisers have freedom to vary their bids by time of day, geography, keywords, and many other dimensions - and these dimensions can be different on different platforms on which an advertiser may want to promote its goods and services. While natural, all of these variables and dimensions make bidding incredibly complicated.
Some large advertisers respond to this complexity by hiring armies of Ph.D. data scientists. Others end up outsourcing the entire bidding part to third-party firms. Many smaller advertisers get overwhelmed and give up advertising, or only focus their attention on just one or two ad platforms.
We don’t believe successfully participating in advertising auctions should be that difficult. Why should brands and vendors feel like they need full training to be able to advertise their own products? Don’t brands have enough to do!? To help advertisers, some of the leading platforms have recently introduced a game changer—autobidding.
Autobidding allows advertisers to specify just a few of their high-level objectives and constraints (e.g., which products they want to promote and what their daily budget is), and the platforms’ internal bidding bots will do the rest, optimally determining an appropriate bid for each opportunity to show an ad to a user, and dynamically adjusting these bids in response to changes in the bidding environment.
Internally, these bidding bots can be very complex, utilizing large data sets and relying on a variety of ML/AI algorithms to optimize the performance of ad campaigns - but crucially, this complexity is hidden from the human bidders, who can enjoy a natural and intuitive user interface, and simply observe the fruits of the optimization.
Sounds a little technical? Well, in the words of the British science fiction writer Arthur C. Clarke, “Any sufficiently advanced technology is indistinguishable from magic.” And this is exactly what a well-designed and properly implemented autobidding system does for its users - it magically gives them strong results from advertising campaigns, without having to spend enormous amounts of time or resources on managing them.
Unsurprisingly, on the platforms where it is available, autobidding has become very popular among advertisers. According to Google, over 70% of their advertisers use autobidding.
On Pinterest, over 80% of cost-per-click revenue comes from automated campaigns. On Facebook, “optimized cost per mille” and other automated campaign types are widely used by advertisers. However, it took these platforms many years of trial and error and a lot of engineering resources to perfect these products.
Topsort’s ad platform was built from the ground up with autobidding in mind, and incorporates it natively - so a marketplace that deploys sponsored listings based on Topsort’s infrastructure can enable autobidding instantly, making it easier for advertisers to start using the product and quickly get positive results, stimulating adoption and reducing attrition.
Jul 26, 2022
Ad auctions have emerged as the best way Sponsored Listings are sold & allocated on top search engines like Google and Bing, why?
The primary reason for the dominance of auctions over alternative placement mechanisms (one-on-one negotiations or fixed prices) is their power, flexibility, and propensity to discover the true value of premium placements on different keywords or categories, in different periods, in different geographies, or for different user demographics.
Different advertisers have a variety of different priorities, preferences, valuations, and constraints, and ad auctions resolve these differences in a simple and elegant way: the highest bidder (adjusted for ad quality and relevance) wins the best placement, and pays an amount sufficient to outbid the next highest competitor.
This amount will vary depending on market conditions, and does not need to be determined by the marketplace—the payment is a direct result of competition among bidders.
By contrast, using a fixed-price mechanism requires the marketplace to forecast demand far in advance, and not just on the overall level, but on a very granular one, for specific category/keyword, geography, user type, etc. (and this includes all the possible combinations of those variables)! This is an intimidating task, virtually guaranteeing that there will be all kinds of mismatches.
Some prices will be too high, pricing out too many advertisers and leaving valuable space unsold. Other prices will be too low, resulting either in over promises to advertisers (and subsequently frustrating conversations with them explaining why their ads could not be shown, even though they were willing to pay the posted price), or in rationing and queues, with advertisers only able to place their ads with a long delay. Posted prices also bring negotiating pressure from the advertisers, who will inevitably try to bargain with the marketplace to try to reduce the prices. By contrast, no such pressure is present in the auction mechanism: prices are set by the overall market competition, not by any individual decision maker.
They can bid higher for the segments of the market that they value more, and can choose times when they want to bid higher and those when they want to bid lower (or not bid at all). They can also learn from their experience in real time, and adjust their bids and strategies accordingly. They can also easily experiment with the advertising product, with very low barriers to entry. These features make auction-based, self-serve advertising systems incredibly attractive to advertisers, leading to wide adoption—which then translates into higher competition, higher bids, and higher revenue for the marketplace.
Perhaps the most striking illustration of these points is the experience of Google with selling sponsored listings. Initially, Google had two separate advertising products.
The first one, Premium Sponsorships, allocated the most desirable space on the page: the very top of the search results, prominently displayed and highlighted. Because this space was so valuable, Google decided to only sell access to it through ad representatives, with a minimum spend of $10,000 for a three-month period. The representatives would then negotiate the terms with advertisers—this was viewed as the best approach, given the premium nature of the placement.
The second one, AdWords, allocated much less desirable space, in small boxes on the right side of the page. For this less desirable space, Google built a self-service, auction-based platform, which allowed advertisers to submit any bids (subject to a small reserve price), customize their ads themselves, and manage the campaigns as they saw fit. After an initial period of experimentation, the company decided on the CPC (cost-per-click) model for these auctions.
Within several months, the success of this product—despite starting in a much less desirable position on the web page—was so overwhelming that Google eliminated the Premium Sponsorships program, subsuming it into the AdWords system, and shifted all advertising, both at the top of the page and on the right-hand side, to an auction-based system. Of course, Google continued to provide premium service to large advertisers, but even for them, their campaigns ultimately participate in the same AdWords auction as those from advertisers who manage their bidding on their own.
Wondering how the real-time auctions work? Read articles about the auctions, sponsored listings, and common features of auction-based advertising
A revenue-optimal ranking rule that takesinto account effects on advertiser satisfaction and user experience
Results of a large field experiment on setting reserve prices in auctions for online advertisements.
Does advertising serve as a signal? Evidence from a field experiment in mobile search
For those who really want to get in the world of auctions and game theory! We curated scientific papers and researches that shaped real-time auctions!
Towards Efficient Auctions in an Auto-bidding World
Could auction welfare and revenue be improved in auto-bidding environments?
Budget Pacing for Targeted Online Advertisements at LinkedIn
An experiment on Linkedin Ads to make ads beneficial to advertisers and publishers!
Multiplicative Pacing Equilibria in Auction Markets
Can markets have multiple pacing equilibria with variations in natural objectives?
Autobidding with Constraints
What happens when all advertisers adopt optimal autobidding?
A bid optimizing strategy which automatically adjusts the bid to achieve finer matching of bid and traffic quality of page view request granularity
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