Like in many other industries, automation is a major trend in Mobile Marketing and especially in user acquisition for mobile apps. Programmatic advertising is one outcome of this trend. By taking much of the manual work out of the process of purchasing ad space, programmatic advertising makes acquiring new users easier, faster, and more efficient. But it also has its downsides. In this article, I will give you an overview of its chances and risks to help you decide whether programmatic advertising might be the right user acquisition channel for your app or not.
WHAT IS PROGRAMMATIC ADVERTISING FOR APPS?
Programmatic advertising or programmatic media buying is defined as “buying digital advertising space automatically, with computers using data to decide which ads to buy and how much to pay for them” (Kenneth Kulbok, interviewed by Marketingweek.com).
HOW DOES PROGRAMMATIC ADVERTISING WORK?
In traditional advertising, traffic usually is sold manually in packages of several tens or hundreds of thousands of ad impressions from one publisher to one advertiser. This approach is rather slow and inefficient, and it also limits the targeting abilities for advertisers, because they can only address large, diverse audiences.
In programmatic advertising, traffic is sold on an impression-by-impression basis. Algorithms analyze what people search for, do, and buy online to find out which apps are most relevant for them. Based on this data, ad impressions are sold to those publishers that can reach these users. This automatic process enables advertisers to show relevant ads to small groups of interested people instead of spraying them on large, undefined audiences.
To identify these interested users, advertisers need data about their age, gender, and other demographics, but also about their behavior. Advertisers can collect this data in their apps or via their social media channels. But they can also get it from other parties such as agencies that assist in building programmatic campaigns. Besides, some companies sell user data to anyone who is willing to pay for it.
THREE TYPES OF PROGRAMMATIC ADVERTISING
There are three common types of programmatic advertising for apps:
On open marketplaces, all connected advertisers and publishers can trade with each other. The algorithms of the platform will sell impressions individually via real-time bidding (RTB) auction on a CPC basis. We will talk about RTB in more detail later in this article.
A private marketplace (PMP) works similarly to an open marketplace. Impressions are sold individually in real-time auctions. But unlike the open marketplace, a PMP is not accessible to everyone. Only preselected publishers can offer inventory on their apps or websites. This makes private marketplaces the right channel for advertisers who want to access premium inventory before other advertisers can access it.
Direct programmatic advertising is somewhat similar to traditional advertising. It is a channel for advertisers with big budgets who want to buy large packages of ad impressions on specific websites or apps that are relevant for their audiences. But unlike traditional advertising, there is no human interaction necessary. Impression packages are usually sold based on fix CPM prices.
ADVANTAGES OF PROGRAMMATIC ADVERTISING
Programmatic advertising transforms the process of media buying from bulk purchases of big impression quantities from one publisher to buying single impressions from many different publishers. This makes long-term commitments that include a high level of uncertainty unnecessary and gives advertisers the ability to target users that are really interested in their apps more precisely. As a result, programmatic advertising is more efficient, much faster, and drives better results than manual media buying.
DISADVANTAGES OF PROGRAMMATIC ADVERTISING
Programmatic advertising also has its downsides. One of them is costs. The basis for programmatic advertising is machine learning. And learning takes time, even for algorithms. Unfortunately, this learning time is not free. While the algorithms test different placements to find the best matches for campaigns, advertisers have to pay the test traffic nevertheless. Depending on the app category, it can take weeks until the campaign generates high-quality users for appropriate prices.
Besides, CPIs in programmatic advertising tend to be higher while user quality is lower than in other channels like Apple Search Ads or Google Universal App Campaigns.
Another monetary factor is the budgets that are necessary for programmatic advertising. Due to the algorithms’ learning process, advertisers have to commit significantly more money to programmatic than to other channels. Also, algorithms tend to prefer big-budget campaigns over small-budget campaigns. To run a successful campaign, usually, budgets of at least $5,000 to $10,000 per month are necessary.
Finally, programmatic advertising is prone to ad fraud. With most elements of the ad buying process being automatized, there are plenty of entry points for fraudsters. And unfortunately, they get more and more sophisticated in developing tools to sneak their fraudulent traffic into the systems.
WHAT IS REAL-TIME BIDDING (RTB)?
Real-time bidding is a technology used in programmatic advertising where single ad impressions are sold via a real-time auction. Computer algorithms perform this process based on user behavior data to find the most relevant impression for each placement.
RTB is often used as a synonym to programmatic advertising, but actually, it is just one way to do programmatic advertising. In other words, RTB is always programmatic advertising, but programmatic advertising is not always RTB.
Real-time bidding is essential for open marketplaces. To understand how RTB works, let us have a look at the technical elements as well as the auction process in detail.
THE TECHNICAL ELEMENTS OF REAL-TIME BIDDING
Real-time bidding requires three different elements to work properly:
- a supply-side platform (SSP)
- a demand-side platform (DSP)
- an ad exchange
The roles of companies in the ad industry are not always separated clearly. For instance, it is not unusual that one platform unifies the functions of an SSP and an ad exchange. However, to clarify how RTB works, we will assume they are different platforms.
What is a SSP?
A supply-side platform helps publishers to monetize their apps or website. They connect their inventory to the platform, specify which ads they allow on their apps or websites, and which minimum bid per impression (floor price) they accept.
What is a DSP?
A demand-side platform is the SSP’s counterpart on the advertiser side. App owners who want to promote their apps use it to set up their campaigns and specify it in terms of maximum bids, budgets, target audience, and campaign goals.
What is an Ad Exchange?
An ad exchange connects SSPs and DSPs. It gathers the information about advertisers’ campaigns from DSPs and publishers’ inventory from SSPs and runs the real-time auction-based on this information.
The figure below illustrates the RTB ecosystem.
Be aware that the figure shows a simplified version of the ecosystem. In reality, it is much more complex, due to several reasons:
- Publishers can be connected to multiple SSPs, and advertisers to multiple DSPs.
- DSPs as well as SSPs can be connected to multiple exchanges.
- Additional intermediaries like ad networks, affiliate networks, and agencies might aggregate advertisers’ demand before forwarding it to DSPs or run campaigns on their behalf.
HOW DOES REAL-TIME BIDDING WORK?
After introducing the crucial players of the RTB ecosystem, now let us have a look at the RTB process. Here is how it works:
- A user opens a mobile app (or a website) that contains an app placement. An SDK that is implemented in the app triggers a bid request for this placement. Together with the information that is available on the user (respectively on the user device), this request is sent to the SSP.
- The SSP forwards the bid request to the ad exchange.
- The ad exchange informs all connected DSPs about the bid request.
- The DSP algorithms check the user information and compare it to the campaign targeting parameters of the advertisers that are connected to the DSP. The algorithms determine a bid on the ad impression for every advertiser that has a matching campaign.
- The DSPs send all bids back to the ad exchange.
- The ad exchange runs the auction by comparing the bids sent by the advertisers against each other. The advertiser who placed the highest bid wins and the winning ad is served to the publisher’s app.
This whole process happens within milliseconds before a website or app loads. Thus, users do not even recognize that it takes place.
There are usually two ways to run a real-time auction: a first-price auction or a second-price auction.
What is a First-Price Auction?
An advertiser who wins a first-price auction pays exactly the amount of his bid, no matter what the second-highest bid is. For instance, if Advertiser A bids $3 and Advertiser B bids $2, Advertiser A wins the auction and pays $3 for the impression.
First-price auctions maximize revenues for publishers, but they tend to create higher costs for advertisers. They are often used for private marketplaces.
What is a Second Price Auction?
The winner of a second-price auction does not necessarily pay the full amount of his bid. Instead, he pays only 1 cent more than the second-highest bid. So in the example above, Advertiser A wins the auction but pays only $2.01 what is 1 cent more than the bid of Advertiser B.
Second-price auctions have been the standard model in mobile app RTB for a long time. But in the last months, more and more providers have switched to first-price auctions.
What is the Clearing Price?
The clearing price is the price that an advertiser actually has to pay when winning an auction. So for second-price auctions, the clearing price equals the second-highest bid plus 1 cent. For first-price auctions, the clearing price equals the winning bid.
In the last years, programmatic advertising has become one of the most important channels in mobile user acquisition. If you want to diversify your traffic sources beyond search ads and the big players Google and Facebook, programmatic advertising is the way to go. With the right partner, you can access new ad placements and scale your app growth in the long term.
However, programmatic is not a traffic channel for newcomers. If you are an independent developer or work at a small app studio with a low marketing budget, you should focus on other channels like Apple Search Ads, Google UACs, or Facebook. Add programmatic to your traffic mix when you are sure that your app is profitable and you have a significant marketing budget available.