Bid shading, a pervasive optimization practice used in programmatic advertising, is likely leading to $6.6bn (£5.2bn) in wasted advertising spend each year. In addition, this practice is not well understood or regarded by most digital media buyers.

These are the key findings of a study commissioned by Cognitiv, which uses AI to more accurately predict consumer behaviour, and carried out by independent research agency, Alter Agents. It conducted a mixed-mode, quantitative and qualitative research study, including five in-depth interviews with 251 digital media buyers, between 8 March and 8 April 2023, to explore the complexity of today’s bidding environment and how current solutions are performing for advertisers. According to the IAB, advertisers spent $109.4bn on programmatic advertising (excluding search) in 2022.

Today, the primary method for programmatic advertising involves a first-price auction. However, in order to avoid overbidding, many buyers employ bid shading, an algorithm that utilizes historical winning bid prices for a given ad placement, suggesting an optimal bid for advertisers. The introduction of first-price auctions and bid shading aimed to rebalance the power dynamics between advertisers and publishers, while promising greater transparency in the bidding process. 

Yet, according to the study, the focus on transparent pricing provided by first-price auctions has shifted the balance of power towards the publishers. Cognitiv’s research found that 75 per cent of digital media buyers believe the switch to first-price auctions has ultimately served publishers more than advertisers, and 64 per cent attest to first-price auctions causing CPMs to increase. Overall, the study concluded that more than a quarter of digital media buyers indicated that the transition to first-price auctions in programmatic media buying impacted their company negatively. 

Given rising CPMs and growing discontent among advertisers around the increasing costs of buying in a first-price auction environment, a new stop-gap solution was introduced by publishers: bid shading. Bid shading serves as a middle ground between second-price and first-price auctions, helping to ensure that advertisers feel like they are getting a better deal on inventory while still preserving the first-price environment. 

Cognitiv’s study found that a third of digital media buyers do not even know that bid shading exists, and only 35 per cent feel extremely confident in their understanding of how a bid shading algorithm works and that they can explain it to others. Yet, the research found, 70 per cent are paying an extra fee for this tool, assuming that it is saving them money. 

The data further reveals that a vast majority of digital media buyers cannot agree on what bid shading does. 33 per cent said it is a tool to adjust their bids for a first-price auction. 32 per cent that it is an algorithm that optimizes their win-rate and CPM. 22 per cent that it is a tool that manipulates their bid so they pay less. And 12 per cent said it was just a process that adds another fee to their bid.

“Bid shading is a generic tool across all campaigns that does not take into account an advertiser’s category, unique campaign goals, or the specific individual being reached by the ad, but instead treats each campaign the same,” said Aaron Andalman, Co-founder and Chief Science Officer at Cognitiv. “Advertisers need a permanent solution, one that is designed for advertisers by media buyers, not a solution that publishers offered as a stop-gap solution to keep advertisers placated.”

You can download the report here.