Programmatic Advertising Explained

Programmatic advertising has been a hot topic in marketing for a while now.

That’s because it dramatically simplifies the digital advertising process for both advertisers and publishers, all the while maximizing the results.

It’s a win-win.

Still, as it is a developing field as well as a techy topic, a lot of marketers struggle to understand it.

In this article, we’ll explain what programmatic advertising is and how it works, answer common questions, and provide a dictionary of relevant definitions that will help you better understand the topic.

But first, let’s take a step back and see how programmatic advertising came into being and why.

A Brief History of Digital Advertising

Once upon a time, ad exchanges were done in person.

This involved meetings and negotiations, as well as manual ad placement, targeting, and monitoring.

Advertisers and publishers were (and still are) eager to show the best ads to the most interested audience, to ensure that they make an impact.

Also, they were pursuing the best deals in terms of costs and pricing, and constantly revisiting prior arrangements with other third parties.

It was time-consuming, exhausting, and stressful.

It was advertising.

Still, it was a working model in print times, and, when implemented properly, it delivered results.

In the early days of online adoption, a similar approach was applied to the digital advertising environment.

However, with the swift evolutions of the digital marketplace, the old ways were no longer feasible.

The digital advertising environment had to deal with completely different volumes – thousands, even millions of possible publishers, practically limitless audiences, and an army of advertisers looking to make their name online.

Digital advertising started to develop its own techniques and types of ads, desperate to reach as many users as possible.

Still, there was the issue of targeting.

Audiences were growing wary of the badly targeted ads and developed a blind spot for them. This, obviously, created a serious issue for the industry.

It called for a new approach that will cater to the needs of the growing numbers of publishers and advertisers and will allow an at-scale solution that offers not only quantity but high-quality targeting.

Luckily, the advancement of technology and the digital transformation of businesses fast-forwarded the process and made this possible.

Enter: Programmatic advertising.

What Is Programmatic Advertising?

Programmatic advertising is an automated process that facilitates the selling and buying of online ad inventories. It allows publishers and advertisers to maximize the effectiveness of these transactions and how to benefit the most from them.

The tools that accommodate the exchange, use algorithms powered by artificial intelligence to allow instant automated targeting, auctioning, and bidding in real time. As a result, the winning ad is provided to the user within milliseconds (approximately 100 ms, to be precise) after landing on a page.

The ultimate goal is to serve the most appropriate ads to an audience that is most likely to click on them.

The calculations are based on the publisher’s website popularity and content, and the advertiser’s audience preferences and ad campaign settings.

Programmatic Advertising Dictionary

When reading into programmatic advertising, you will come across a bunch of terminologies being thrown around, including, but not limited to, various acronyms.

To help you better understand what these terms mean, and, thus, better understand the concept of programmatic advertising, we’ve prepared a short dictionary:

• Ad Exchange. This is a digital marketplace where ad spaces are auctioned off. The process is completely automated.
• Demand Side Platform (DSP). A software program used by advertisers to browse and buy ad space inventory from various publishers. It facilitates the advertiser’s part of the transaction.

Depending on the platform’s functionality, the buyer can set up their budget, supplier preferences, audience profiles, etc.

• Supply Side Platform (SSP). A software program used by publishers to offer and sell their ad spaces to various advertisers. It facilitates the publisher’s part of the transaction.

Depending on the platform’s functionality, the supplier can set up pricing frames, types of buyers, communication channels, etc.

• Data Management Platform (DMP). An integrated software solution that collects user data from different sources and facilitates data asset management. It is used to identify and target audiences in advertising campaigns.

Most modern DSPs and SSPs have an integrated DMP, so that the user doesn’t have to use a third-party data management system.

• Impressions. The number of times an ad is displayed on a page to be viewed by a user.

• Cost Per Mille (CPM). Also known as Cost Per Impression, CPM is the price per 1000 ad impressions that show up on a website.

As you can see, all these complicated terms have quite straightforward definitions when you put them into context.

However, if you still feel a bit confused, fret not, as these will become even clearer when we explain the specifics of the programmatic advertising process.

How Does Programmatic Advertising Work?

Now that you know the programmatic advertising basics, we can move on to how the process works.

1. The User Visits a Page. While users are online, data management platforms (DMPs) collect information about them, such as demographics, geographical data, device type, browsing activity, behavior, visited websites and pages, and whatnot.
   When a user lands on a page, the programmatic advertising process begins.
2. The Ad Exchange References SSP Data. The ad exchange system pulls data from the SSP about the publisher, a.k.a. the website owner, and their available ad inventory on the page, as well as any available user data.
3. The Ad Exchange References DSP Data. Next, the ad exchange cross-references this information with the potential advertisers and targets data from their DSPs, selecting the potential buyers that match the criteria for the inventory.
4. An Auction Takes Place. The DSPs provide the biddings of the selected buyers, and the SSP or the ad exchange (it depends) uses an auction model to determine the winner (usually, the highest bidder).
5. The Ad Is Served to the User. Once an advertiser wins the auction, their ad shows up to the user in the ad space of the publisher has specified.

As mentioned, thanks to artificial intelligence, all this happens within 100 ms after the user clicks on a link to open a page.

Impressive, right?

However, time is not all that you save with programmatic ads – the cost is a factor as well.

Is Programmatic Advertising Cost-Effective?

Simply put, yes. More often than not, programmatic advertising is cost-effective.

In fact, compared to in-person types of negotiations and ad exchanges, programmatic advertising has a significantly higher ROAS (return on ad spend).

The average cost of programmatic ads is around $0.50 to $2 CPM, as opposed to more than $10 for traditional ad trading!

Still, how much you spend in the end, depends on different factors including the industry, the device, the ad format, the placement on the page, etc.

Furthermore, the more specific targeting the advertiser requires, the more likely it is that the ad will serve a user that may engage and convert, and, thus, the higher the CPM becomes.

Types of Programmatic Advertising Auctions

The auctioning process is one of the most confusing parts of programmatic advertising, so let’s have a look at the common types of auctions, and how they work:

• Open Auction. In an open auction for media inventory, pricing happens in real time, a.k.a. real-time bidding (RTB). The publisher offers their inventory and sets a minimum price, and any eligible advertiser can bid on it.

Usually, the highest bid wins.

• Private Marketplace (PMP). The PMP is similar to the RTB but only selected publishers and advertisers can access it.
• Programmatic Direct. Although more often than not, programmatic advertising involves auctions and bidding to determine the price of the inventory, occasionally, the publisher can set a fixed CPM. This option may be available only to a selection of buyers or can be the default and be accessible to all advertisers.
• Preferred deal. In this case, auctioning is bypassed, and the publisher sells its premium inventory to a selected group of advertisers. The CPM is fixed, and the buyers can bid on it or offer a higher price.

Furthermore, there are two most common models that determine the winner of the auction. In both cases, the highest bidder wins. What makes them different is the price that they pay:

→First Price Model. In this type of bidding, the winner pays the amount that they bid, regardless of how much the other participants in the auction offer.

This model is more beneficial to publishers because they receive a higher price for their inventory, which is, ultimately, their goal.

→Second Price Model. In this case, the winner is still the highest bidder, however, they pay the bidding of the second one in line, plus an extra one cent.

This model is more beneficial for advertisers because they pay less than they were ready to, which is, ultimately, their goal.

Pros and Cons of Programmatic Advertising

As with any other technology, programmatic advertising has its advantages and disadvantages:

Advantages of Programmatic Advertising

Let’s first have a look at the positives of programmatic advertising:

Excellent Targeting

The targeting precision that programmatic advertising offers is, currently, unmatched.

By reaching the right audience, advertisers can achieve higher engagement, more conversions, and, ultimately, more successful campaigns.

At the same time, publishers can benefit from higher ad revenues and less frustrated readers.

Efficiency

Compared to other ad trading methods, programmatic advertising saves time, resources, and effort, all the while providing efficient results at scale.

Advertisers can buy inventory from an unlimited number of relevant websites in mere seconds. And publishers can find the best buyers with next to no effort and ensure a pleasant UX.

All that both sides need to do is properly set up their platforms.

Real-Time Data

Advertisers and publishers have access to real-time insights and analytics. This allows them to implement timely adjustments and optimize their campaigns for better results.

Disadvantages of Programmatic Advertising

While the advantages of programmatic advertising are undisputable, there are also some potential concerns:

Requires Understanding of Your Audience

For programmatic ads to deliver the required results, both the advertiser and publisher must have a deep understanding of their audience. Otherwise, they may not be able to target their ads properly, and are less likely to achieve results.

Fraud Risk

Due to its full automation, the process can lead to high fraud risk. This can be an issue for both the advertisers and publishers.

The buyer side can suffer, among other things, from fake traffic and misrepresented inventory. And the seller side faces risks of data and attribution fraud and unsuitable creatives.

Most of these issues can be prevented and avoided with anti-fraud techniques, but these take time and practice to implement.

Limited Hands-On Control

Since the ad exchange connects thousands of publishers and advertisers, both sides have little control over who they match with.

For advertisers, this creates the risk of being associated with fake news and/or low-quality publications, and, as a result, they could lose their credibility.

Fortunately, more often than not, advertisers can avoid this. Most DSPs allow users to create blacklists of individual websites and website categories and prevent their creatives from showing there.

For publishers, the main risk is in selling their inventory to providers of 18+ websites, gambling, and/or other controversial or unethical content. Furthermore, even if the ad creatives are not in violation of common ethics, they may not be aligned with the values of the publisher and their audience.

For example, it’s not appropriate to show an ad for a steak house on a vegetarian blog.

This can be resolved by using a specialized creatives verification system, or an all-purpose security kit such as The Media Trust.

Requires a Trained AdOps Expert

Without an expert to operate the technology, businesses may not be able to use its full potential. This may lead to losing money, instead of boosting their ROAS.

Some platforms are self-service and easy to use. However, both the publisher and advertiser may still need to hire an AdOps specialist or even a team of experts.

They can learn the ins and outs of the DSP/SSP and ad exchange systems. Meanwhile, they also need to keep up with new developments, data management, and fraudulent schemes.

Bottom Line

Programmatic advertising is the future of online ads. Artificial intelligence and machine learning are advancing dramatically. So, the technology tends to develop at a fast pace and promises more opportunities yet to come.

Publishers and advertisers can improve the ad experience for users, maximize the performance of their campaigns, and achieve unprecedented results.

And, who knows what the future holds? Maybe this technology will even help us turn the concept of advertising into something positive.