By Iryna Kozirevych
Ad exchanges are integral participants of programmatic media advertising, but what is their specific role? What are they responsible for, and how do they work? In our guide, we will provide a sufficient ad exchange definition, clearly explain the principles of its work, and not only. Keep reading to learn more about the programmatic industry and gain actionable insights.
What is an Ad Exchange?
So, what are ad exchanges? These are digital platforms that allow advertisers and publishers to connect with each other and, therefore, enable the process of buying and selling of digital inventory.
The ad exchange technology is a part of programmatic advertising, and the inventory is usually sold via real-time auctions. These virtual marketplaces come in different formats:
Open digital ad exchanges: all the media buyers can take part in the auction.
Private ad exchanges: only advertisers selected by a publisher can compete for the inventory.
Preferred ad exchanges: website and app owners offer their ad space to specific advertisers at a negotiated price before sending it to private or open auctions.
Basically, a programmatic ad exchange works as an intermediary between supply- and demand-side platforms. It is the place where auctions happen. Additionally, exchanges send commands to servers when the winner is defined.
Note that ad exchanges are not the same as ad networks. Networks buy ad space from publishers and then sell it to marketers, and this approach does not usually include real-time bidding capabilities. Therefore, there is no such term as “ad exchange network”, as networks and exchanges are different things, even though they are often confused with one another.
Historical Context and Evolution of Advertising Exchange
Before we dive deeper, let’s explore the evolution stages of programmatic exchange platforms. Basically, there are two key milestones that you should be aware of.
Ad Exchanges Enter the Stage
Initially, the digital advertising landscape was revolutionized by ad servers and networks. However, with the growing number of websites, it became more complicated for publishers to monetize their remnant inventory. Ad networks simply couldn’t deal with the load.
That is when, in the mid-2000s, ad exchanges entered the stage and provided both advertisers and publishers with automation capabilities. Another benefit was greater accessibility since more websites were allowed to join the ecosystem.
Real-Time Bidding is Introduced
The digital ad exchange technology evolved quickly, so only a few years later, RTB, the first programmatic bidding model, was introduced. Instead of selling ad inventory in bulk, publishers got an opportunity to do this on a per-impression basis. RTB is still widely used in programmatic advertising, and we will provide more details about this technology later.
Deep Dive into Mechanisms
You already have some basic knowledge of how an ad exchange platform works. Now, let’s take a closer look at its mechanisms.
Real-Time Bidding (RTB) Explained
So, getting back to RTB, it allows selling ad inventory via instant auctions. After a user enters a website or an app and an impression becomes available, this data is sent to a supply-side platform where a publisher sets the bid floor. Then, the request is delivered to the demand-side platform, and the RTB auction takes place on an ad exchange. The highest bid wins, and the ad is delivered to the user. The whole process takes only a couple of seconds.
For marketers, real-time bidding enables more precise targeting so they can advertise more effectively. Since they can purchase more relevant inventory, the ads are delivered exactly to those users who are most likely to be interested in this content. This way, advertisements have higher ROI.
For publishers, RTB auctions allow them to drive revenue and increase their fill rates. Besides, since RTB allows more effective targeting and higher content relevance, the experience of their website visitors and app users is not affected.
Auction Types
In RTB, there are two main auction types: first-price and second-price.
First-price auctions: the highest bid wins, and an advertiser pays the exact bid amount.
Second-price auctions: the highest bid wins, and an advertiser pays $0.01 more than the second highest bid.
First-price auctions are beneficial for both publishers and advertisers. Thus, it becomes easier for marketers to outline their financial strategies. In turn, publishers drive higher revenue, while the auction itself is more transparent. During second-price auctions, marketers may place unnaturally high bids since they know that they will still pay less if they win.
However, second-price auctions still allow advertisers to prevent overspending and collect insights regarding competition, which can help optimize future bids. As for publishers, they may earn less, while it also becomes more difficult for them to understand the real value of their inventory. At the same time, they may experience higher demand for the ad space since advertisers know that they will not overpay.
Key Players and Their Roles
Ad exchanges are not the only participants of the programmatic ecosystem, so let’s review other players to provide you with a better understanding of how everything works:
Supply-side platforms (SSPs): software used by publishers to manage their ad inventory, sell it, and analyze the results to optimize the selling process and maximize income.
Demand-side platforms (DSPs): software used by advertisers for programmatic ad buying. Via DSPs, marketers set up their campaigns and join the auctions when a relevant impression becomes available. Basically, DSPs are the reverse side of SSPs.
Ad servers: software responsible for delivering and storing digital ads. After the winning bid is identified, a server receives a notification from an advertising exchange, and the ad is sent to the publisher.
Data management platforms (DMPs): platforms that collect, arrange, analyze, and store customer data. They can be integrated with DSPs, SSPs, and exchanges to ensure relevant ad distribution.
Expert Opinions and Interviews About Ad Exchanges
Programmatic technology, including digital ad exchanges, is a powerful ally for advertisers and publishers. However, it must be used in the right way, so here are several expert opinions to keep in mind.
Human Oversight is Still Required
Even after setting up all the parameters, it is still essential for marketers and publishers to keep an eye on the process. Yes, auctions are instant, and everything happens automatically, but not everything should be done by AI. For instance, publishers and advertisers need to continuously analyze the results on their own to make timely decisions regarding optimization, while owners of ad exchanges should also look at what is happening on their platforms and integrate traffic and demand scanners for their partners.
Targeting Matters
Accurate targeting has always been important in digital advertising, and the programmatic approach is no exception. To reach their audiences via exchanges, advertisers should set up as many targeting settings on their DSPs as possible. This will allow them to reach their audiences effectively and drive conversions.
Third-Party Cookies are Fading Away
The effective performance of an exchange heavily relies on the data provided by advertisers via DSPs. Previously, a lot of data could be collected via third-party cookies, and this opportunity is still here even though it is limited. However, the end of the cookie era is coming, so marketers should start switching to first-party data. There is no time to hesitate — those advertisers who already rely on first-party data will have a strong competitive advantage when cookies are fully eliminated.
5 Strategic Insights for Businesses
Why is ad exchange important? Apart from automating the auction process, it improves brand safety for both publishers and marketers. Additionally, advertisers benefit from better control over their budgets, while publishers can reach more effective inventory monetization. But how to choose the right ad exchange? Here are some recommendations to follow.
Keep Your Goals in Mind
As you remember, there are different types of advertising exchanges: open, private, etc. Therefore, the first step to take is to identify your goals. For instance, if you, as a publisher, want to access a wider pool of marketers, preferring an open exchange may be the right decision.
Decide on the Ad Formats
Exchanges may support different ad formats, so it is essential for advertisers to decide what campaigns they are going to launch. The same applies to publishers — they should understand what inventory they can offer. For instance, these can be display, native, or audio ads. Deciding on the required formats is the way to limit the list of potential options and simplify the choice.
Aim for Transparency
The right ad exchange should provide information regarding where the ads appear, as well as about the associated transaction costs and potential fees.
Check the Quality of the Inventory
For advertisers, it is also crucial to check the quality of ad inventory available on an ad exchange. Choosing a platform that works with reputable websites that have engaged audiences will lead to more effective ad placement and higher ROI.
Explore Targeting and Security Features
Advanced targeting capabilities ensure greater relevance of the ads, which is important for both marketers and publishers. Besides, the solution should be equipped with security functionalities for detecting and blocking fraudulent activities, filtering out risky inventory, and so on.
Discover the Power of Our Ad Exchange for Your Business
Ad exchanges are important not only for advertisers but also for publishers. Launching an ad exchange platform is a way to join the programmatic environment and start earning on media trading by connecting supply and demand partners. However, building such a solution with all the essential functionalities is a rather time-consuming task. At Attekmi, we are ready to help you solve it.
To meet your needs, we offer several ad exchange solutions, and getting one of them will enable you to achieve payback and start driving revenue quickly. For instance, Toucan Ads managed to achieve almost 300% ROI in 6 months. Find more case studies here to see what heights you can achieve with Attekmi solutions.
Does Attekmi sound like the right choice? Then contact us!
FAQ
How does an ad exchange work?
When an impression becomes available, an exchange receives the request from an SSP and sends it to a DSP. Then, the DSP connects to the exchange and places the bid. The auction takes place, and the winning ad is displayed to a user. This way, the exchange performs as an intermediary between SSPs and DSPs.
What are the benefits of ad exchange platforms?
Automation is the key benefit. However, advertising exchanges also help both marketers and publishers ensure brand safety. Additionally, advertisers get better control over their budgets, while publishers get more opportunities to monetize their ad inventory.
Who uses ad exchange platforms?
Marketers and publishers connect to advertising exchanges via demand-side platforms (DSPs) and supply-side platforms (SSPs), respectively. Then, when an impression becomes available, the auction takes place on the exchange, and the winning ad is delivered to a publisher. This process is automatic and happens within a couple of seconds or even less. Ad networks may also buy ads from exchanges.