What Is Programmatic Advertising and How Does It Work?

Ben Tippet

Programmatic advertising revolutionises the way digital advertising space is bought and sold. Before this innovation, the tasks of ordering, configuring, and reporting on ads were all performed manually, a process that was often cumbersome and time-consuming. Programmatic advertising has streamlined these processes, enhancing both efficiency and effectiveness. With the advent of specialised programmatic platforms, access to various ad formats and channels has become seamless, as they have cultivated extensive ad inventory and databases.

Who Utilises Programmatic Advertising?

Programmatic advertising has become a vital tool for businesses and enterprises looking to advertise on digital platforms. In the era before programmatic ad buying, the manual purchase and sale of digital ads made the process not only costly but also inconsistent.

Now, programmatic advertising is soaring to new levels, largely due to publishers incorporating native ads on their websites. One of the primary motivations for publishers to adopt programmatic native advertising is its resilience against ad blockers, compared to other ad formats and platforms.

Furthermore, this approach provides marketers with additional time to refine and enhance ads using programmatic techniques, ensuring the successful execution of advertising campaigns.

How Does Programmatic Advertising Work?

How Programmatic Advertising Functions

Programmatic advertising serves as a bridge, connecting publishers—who have websites with available ad space (or ad inventory)—with advertisers eager to purchase that space to showcase their brand.

When an advertiser plans to initiate a digital campaign to market a product or service, they reach out to their programmatic ad agency or trading desk. This agency employs a demand-side platform (DSP) to automate the buying of ad impressions, aligning with the campaign’s objectives.

The DSP enables advertisers and their agencies to acquire ad inventory from various publishers. It also ensures that the ads are directed at the appropriate audience by utilising a data management platform (DMP), which handles audience data. This data, considering factors like location, demographics, user behavior, and online activity, is used to pinpoint the ideal audience.

When an individual who matches the advertiser’s target audience visits a publisher’s website, the site sends an ad request to the supply-side platform (SSP). The SSP, used by publishers to sell ads, orchestrates an auction with the goal of maximising the revenue from each impression. The DSP is integrated into this process.

The DSP analyses the ad and aligns it with its data and targeting criteria, determining a bid price for the impression. This real-time process, often known as real-time bidding, is conducted within the SSP or ad exchange.

Though this may seem like an intricate procedure, the entire bidding process is completed in a mere 100 milliseconds. Once the impression is sold, it’s transmitted to the publisher’s website for display. This cycle continues each time a user lands on the site or refreshes the page.

What Are Programmatic Platforms?

Programmatic platforms are specialised tools designed to facilitate programmatic advertising. With a variety of platforms available, publishers can identify the right services and connect with suitable advertisers to meet their specific needs.

These platforms are integral components of the entire system that drives programmatic advertising. Each part of this system collaborates to serve both publishers and advertisers, ensuring mutual benefits. Key types of programmatic platforms include the Demand-Side Platform (DSP), Supply-Side Platform (SSP), Data Management Platform (DMP), and Ad Exchange.

Below, we’ll explore each type of programmatic advertising platform to gain a deeper understanding of their functions and the audiences they cater to.

What is a Supply-Side Platform (SSP)?

An SSP is a digital platform that manages the inventory of publishers. When a publisher designates a webpage for advertising, they place a pixel code on the page to monitor visitor behavior after an agreement is reached on the Ad Exchange.

This code gathers anonymous data about visitors and their actions, allowing the SSP to optimise the value that publishers receive from each ad impression (an instance where the ad is displayed to a viewer).

The SSP grants publishers the ability to filter ads by advertiser and other criteria, and to set varying rates for ad spaces, thereby defining the cost.

What is a Demand-Side Platform (DSP)?

A DSP represents the advertiser’s side of the programmatic process. Advertisers submit their bids to a DSP, which then makes decisions on their behalf.

Storing user profiles and third-party data, a DSP merges this information with advertisers’ bids. When visitors land on webpages, the DSP determines which ad to display, considering factors like the highest bid, ad content, and cost to the advertiser.

The pixel code placed by publishers on their website helps in creating audience segments, sending this information to the DSP. With advertisers poised to bid automatically, the DSP ensures the best ad reaches the right audience.

Both advertisers and publishers benefit from this process—advertisers through precise ad placement, and publishers by securing the highest bidder.

What is the Difference Between an SSP and a DSP?

In essence, a DSP and an SSP serve distinct roles within the programmatic ecosystem.

A Demand-Side Platform (DSP) is a tool utilised by advertisers to streamline ad-buying, while a Supply-Side Platform (SSP) is employed by publishers to link their inventory to ad exchanges. Together, they form a cohesive system that efficiently connects advertisers with publishers, ensuring that the right ads reach the right audiences at the right price.

Is Google Ads a DSP?

Yes, Google Ads (formerly known as Google AdWords) functions as a type of DSP, but it’s confined to Google’s inventory.

While the Google Display Network extends to over 2 million websites, there remain areas beyond its reach. One significant advantage of utilising a third-party DSP is the access to inventory not encompassed by Google’s ad network. For an advertiser, this broader access enhances the likelihood of discovering profitable placements.

What Is a Data Management Platform (DMP)?

In the realm of programmatic marketing, having accurate data is crucial. A DMP is a specialised platform that gathers, organises, analyses, and activates data. It furnishes advertisers with detailed user profiles, enabling the data to be integrated into a programmatic algorithm. This ensures that the most likely-to-convert visitors are matched with the most suitable ads.

What Is the Google Ad Exchange (AdX)?

The Ad Exchange is the meeting point for DSP and SSP, where ads are traded. Some ad exchange systems amalgamate DSP, SSP, and DMP into a unified platform, catering to both publishers and advertisers.

However, it’s essential to recognise that these combination platforms might not provide the same level of functionality as individual platforms. While they may offer a variety of basic features, they might not support advanced settings and control, potentially limiting their effectiveness in specific scenarios.

Buying and Selling: Auction Types for Programmatic Advertising

Programmatic advertising offers several auction types, each providing distinct advantages to publishers. These auction methods cater to various needs and strategies, allowing for flexibility and customisation in the buying and selling process.

In addition to these auction-based approaches, direct methods of sale and purchase are also accessible. These direct methods can grant publishers and advertisers even greater control over the process, enabling more precise targeting and potentially more profitable outcomes. Whether through auctions or direct sales, the diverse options within programmatic advertising create a dynamic marketplace tailored to the unique requirements of each participant.

Different Auction Types Available for Programmatic Advertising

  • Header Bidding – A method where publishers simultaneously offer inventory to multiple ad exchanges before reaching ad servers. This increases competition and can boost publishers’ revenue.
  • Exchange Bidding – A server-side unified auction where exchange networks and SSPs bid on ad inventory. Often seen as Google’s response to header bidding, it streamlines the process.
  • First Price Auction – Advertisers bid for an impression, with the highest bid winning and setting the price. The winning advertiser pays the publisher the amount of their bid.
  • Second Price Auction – The highest bidder wins but pays only a cent more than the second-highest bid. This method encourages true-value bidding.
  • Open Auction – A public marketplace where the Ad Exchange pairs buyers and sellers, aiming for the highest bid.
  • Private Marketplace (Non-guaranteed PMP deals) – An invite-only model that allows publishers to restrict their ad inventory to a chosen group of advertisers. Publishers control who advertises on their site, setting a minimum price but allowing multiple bids.
  • Real-Time Bidding (RTB) – These are real-time auctions that complete in milliseconds, typically conducted by SSPs or ad exchanges.
  • Programmatic Guaranteed/Direct – This involves the direct sale of reserved ad inventory, where automation replaces manual processes. There’s no bidding in this transparent method, which helps prevent fraudulent ad spaces.
  • Preferred Deal – This method bypasses auctions altogether, granting advertisers exclusive access to inventory at a negotiated price.

These various auction types offer a range of options for publishers and advertisers, each with unique benefits and considerations. By understanding these methods, participants in the programmatic advertising ecosystem can select the approach that best aligns with their goals and strategies.

How Much Does Programmatic Advertising Cost?

The cost of programmatic advertising is not fixed, as it operates on a CPM (cost per mille) model, where costs are calculated per 1,000 ad impressions. This means that the price can fluctuate based on various factors, making it adaptable to different needs and budgets.

Here are some key elements that can influence the cost of programmatic advertising:

  • Type of Industry: Different industries may have varying competition levels and target audiences, affecting the CPM.
  • Targeted Device: Targeting specific devices, such as mobile or desktop, can alter the cost.
  • Ad Format: Different formats, such as video or banner ads, may have different pricing structures.
  • Ad Placement on the Page: The location of the ad on a webpage, whether it’s a header or sidebar, can impact the cost.
  • On average, programmatic CPMs are often considered a more economical option compared to social media advertising methods and offer significantly better value than traditional offline advertising approaches.

This cost-effective nature of programmatic advertising means that even small businesses with constrained marketing budgets can leverage programmatic ads as a vital component of their digital marketing strategy. It provides a flexible and scalable solution that can be tailored to various advertising goals and budget constraints.

Digital Advertising vs. Programmatic Advertising

Digital advertising aims for broad reach and audience engagement, while programmatic advertising employs precise targeting tactics, leveraging real data to segment audiences. Programmatic advertising melds technological advancements with human expertise, streamlining the process of buying, placing, and optimising ads.

Companies like Gourmet Ads showcase excellent examples of programmatic advertising through their case studies. Clients such as Envato and OzBargain have reaped the benefits of programmatic advertising, gaining control over site content and optimising ad revenue.

Programmatic Advertising Trends

Programmatic advertising is a dynamic field, continually evolving and adapting. Various trends emerge as the industry progresses, making it essential to stay abreast of the latest developments.

What’s Next for Programmatic Advertising?

Several factors are shaping the future of programmatic advertising:

Artificial Intelligence (AI): AI and machine learning are being employed to detect patterns and predict outcomes in real-time across multiple data points. As AI advances, it will enable more accurate ad placement, reducing costs.

Increased Personalisation: Programmatic technology, coupled with AI, allows for real-time optimisation and measurement. Dynamic Creative Optimisation (DCO) leverages this to deliver highly relevant and personalised ads to targeted groups, benefiting both advertisers and publishers.

Preventing Ad Fraud: Ad fraud is a significant concern, with advertisers losing billions globally. Predicted to cost the industry $32 billion by 2022, solutions like blockchain and initiatives like ads.txt are being implemented in programmatic advertising to combat this issue.

Companies like Gourmet Ads are also contributing to this fight, offering tools like AdWizard, an industry-leading ad ops extension. This tool empowers publishers to manage and protect their ads, ensuring that only legitimate and relevant ads appear on their sites.

Programmatic advertising represents a sophisticated and efficient approach to digital marketing. By embracing the latest technologies and trends, it offers a flexible and targeted solution that can adapt to the ever-changing landscape of online advertising. Whether you’re a publisher looking to optimise revenue or an advertiser seeking precise targeting, programmatic advertising provides the tools and insights to achieve your goals.

How Can We Help Publishers?

At Perth Digital Edge, we specialise in programmatic advertising services, leveraging our deep understanding of how this innovative approach functions. We recognise the transformative impact it can have on your business, enabling you to elevate your revenue by taking control of your ad inventory. With our expertise, we can tailor solutions that align with your unique needs and objectives. Contact us today to discover how we can help you find your digital edge today.

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