What is Programmatic Advertising? The Definitive Guide (2023)

Although programmatic advertising has revolutionized the advertising technology industry, there are still some misunderstandings about how it works. This is the definitive guide to what programmatic advertising is, how it works, and how it will continue to evolve in the future.

What is Programmatic Advertising?

Programmatic advertising is the process of buying and selling advertising space through digital platforms. This eliminates the need for requests for proposals, tenders, quotes, and human negotiation, which were traditionally used before programmatic advertising.

Programmatic Advertising Definition

Programmatic advertising is the automated buying and selling of online advertising through software instead of traditional human negotiations and manual agreements.

Ad exchanges provide marketplaces for digital advertising space through automated auctions that bring together buyers and sellers:

• Buyers: Advertisers interested in purchasing online ad space
• Sellers: Website owners/publishers who have digital ad space to sell

Programmatic advertising speeds up the process of buying and selling ad space. It uses software to match buyers and sellers in a fraction of a second as the website or app loads.

How Does Programmatic Advertising Work?

Programmatic advertising uses software to manage the buying and selling of digital ad impressions. Buyers (advertisers) target users based on their behavior, demographic data, cookie data, and other variables across different websites. This enables advertisers to reach specific audiences that are more likely to be interested in the advertiser’s goods and services.

Understanding how the various components of the programmatic advertising ecosystem interact can be challenging. Check out our ultimate Ad Tech Glossary for a quick overview of all the basic terms and jargon

Let's break down the process of how programmatic advertising works step by step:

1. When a user lands on a publisher's website, their data is sent to a Supply Side Platform (SSP). Publishers use an SSP to manage their ad inventory and offer it to the market.
2. The SSP sends the impression on to an ad exchange which is a digital marketplace that connects platforms and agents looking to buy and sell ad inventory.
3. The ad exchange offers the impression to Demand Side Platforms (DSPs). A DSP is a platform that allows advertisers to buy display ad space with the help of algorithms that target specific users.
4. DSPs are connected to Data Management Platforms (DMPs). DMPs help advertisers decide which users to target by matching the user data from the SSP to their own vast databases of user data. The data from a DMP is also known as third-party data. Brands can merge first and third-party data to strengthen targeting capabilities.
5. The ad exchange receives bids from advertisers via the DSPs and awards the impression to the advertiser with the highest bid.
   When an advertiser wins an impression, the publisher renders the advertiser's creative on the website.

This entire process happens in milliseconds before a page loads.

Why Use Programmatic Advertising?

Programmatic advertising has made the process of buying and selling ad space more transparent and efficient. Before programmatic advertising, buyers and sellers had to find suitable opportunities and create agreements manually. This was a time-consuming process as it involved requests for proposals (RFPs), tenders, quotes, and negotiations. Programmatic advertising introduces an intricate system that relies less on human interaction and more on software and automation to complete this process and display ads on the web. Overall, this has drastically simplified and sped up buying and selling ad space.

Furthermore, programmatic advertising is soaring to new heights with spending forecasts exceeded year on year. By the end of 2021, over 89% of all digital display marketing in the US was done via programmatic advertising. Additionally, experts anticipate that programmatic ad spending will accelerate to nearly $100 billion in 2022.

What Are Programmatic Advertising Platforms?

Programmatic advertising platforms enable publishers and advertisers to automate the buying, selling, and management of their digital ad inventory. Media buying, ad placement, performance tracking, and campaign optimization are all part of this process. Some platforms even have tools for creating campaign creatives.

 

Types of Programmatic Advertising Deals

The four most common programmatic deal types are:

1. Real-Time Bidding (RTB)
2. Private Marketplace (PMP)
3. Preferred Deals
4. Programmatic Guaranteed

In contrast to traditional media buying, programmatic advertising does not always require advertisers and publishers to interact one-on-one to serve ads. When it comes to serving advertisements on publishers' websites, different programmatic deals define the rules. Let's take a look at the four most common programmatic deal types:

1. What is Real-Time Bidding (RTB)?

Real-time bidding (RTB) has become synonymous with programmatic media buying due to its extensive use. It is also known as "open auction" or "open marketplace". In RTB, ad spaces are available to everyone and are sold through an open auction system. The highest bidder can display their ad in the available space. The entire process happens in real-time, and advertisers can choose from various ad spaces as they become available.

Although the highest bidder receives the ad space in RTB, they are not required to pay their bid amount. RTB uses the second-price auction system. In second-price auctions, the highest bidder pays only $0.01 more for the slot than the second-highest bidder offered. This means advertisers never vastly overpay for impressions. As a result, second-price auctions are the most widespread type in programmatic advertising. In contrast, 1st price auctions enable advertisers to overpay as the highest bid wins, meaning advertisers could pay a significant amount more than the second-highest bidder.

RTB is simple to set up and optimize, but it lacks transparency from the advertiser's standpoint. Advertisers are aware of the broad category of publishers but not of the specific publisher websites where their display ad will appear.

Is Programmatic Buying The Same As Real-Time Bidding?

No, real-time bidding (RTB) is one type of programmatic ad buying. However, it is not the only one. RTB refers to the purchase of ads through real-time auctions, but programmatic software also allows advertisers to buy guaranteed ad impressions in advance from specific websites.

Is Header Bidding Programmatic Advertising?

Yes, header bidding is an advanced programmatic advertising technique that is a subset of real-time bidding. Header bidding is also sometimes referred to as advance bidding or pre-bidding and gives publishers a way to offer ad space to numerous SSPs or ad exchanges simultaneously. Publishers have seen an average revenue increase of 57% when using Snigel’s header bidding stack AdEngine. Check out these header bidding case studies to see how a well-optimized setup can maximize your yield. If you have been using AdSense or AdSense alternatives to monetize your site, the chances are high that you will increase your revenue even further with a programmatic solution like header bidding. Our free AdSense revenue calculator tool can give you an idea of how much your website could earn with either header bidding or AdSense.

What is the difference between Header Bidding and Real-Time Bidding?

Header bidding is a type of real-time bidding. Header bidding improved RTB in the same way that real-time bidding improved programmatic buying.

 

When RTB started, there were still several inefficiencies in the auction process. Advertisers did not submit bid proposals simultaneously but were lined up in a waterfall pattern. The highest-ranking bidders were first, followed by lower-ranking bidders. The ad impression was first offered to the top-ranked bidders where it was usually purchased. As a result, the lower-ranked bidders were rarely able to participate or gain access to premium ad impressions even if they were willing to pay more. Header bidding, which benefits both publishers and advertisers, was introduced to replace this waterfall approach. Make sure to read our expert guide on how header bidding works for more information. If you have specific questions or want to implement header bidding on your website, you can get in touch with our team of ad tech experts.

2. What is a Private Marketplace (PMP)?

Private Marketplace (PMP) deals are created when publishers set up a batch of premium ad inventory designated solely for certain advertisers in a private or closed auction. Many DSPs have their own PMPs that are only available to DSP users and clients.

Websites and media with a large audience utilize PMPs because of the benefits they provide to publishers. Unlike RTB, a PMP advertiser knows which websites their advertisements are shown on, allowing them to analyze their ads' ROI accurately.

3. What are Preferred Deals?

Advertisers can select ad inventory at a predetermined price with preferred deals before publishers make it available on private marketplaces or open auctions.

Preferred deals, also known as spot buying, take a more refined approach to negotiations because both sides agree on pricing, targeting, and other details ahead of time.

The advertiser gets to assess the publisher's ad inventory but isn't obligated to buy anything. Advertisers can utilize a DSP to learn more about their target audience and decide whether or not to buy ad impressions.

4. What is Programmatic Guaranteed?

Programmatic guaranteed, often known as programmatic direct or automated guaranteed, is closer to the traditional way of ad space buying. The advertiser and publisher meet one-on-one to reach an agreement for purchasing ad impressions.

Unlike the other methods of media buying we looked at, programmatic direct does not use a bidding system. Following the negotiation, the inventory is sold straight to the advertiser. Advertisers who use programmatic guaranteed have more options for ad placements, rates, audience targeting, and frequency capping.

Advertisers who know precisely where they want their ads to appear and have considerable digital advertising budgets are likely to opt for programmatic guaranteed.

What is a Demand Side Platform (DSP)?

Advertisers can use Demand Side Platforms to build, target, optimize, and automate their digital ad campaigns. SSPs, Ad Networks, Ad Exchanges, and publishers all communicate with DSPs.

Is Google Ads a DSP?

Yes, Google Ads is technically a DSP. Google Ads (previously known as Google AdWords) is Google's own digital advertising tool that allows you to have your website's search results appear on Google’s search engine results page. Google differs from most other DSPs in that it only sells its own inventory (while other DSPs make it possible to purchase traffic from various suppliers).

What is a Supply Side Platform (SSP)?

An SSP is a programmatic solution that allows publishers to sell their inventory to buyers and bring in revenue. Buyers can access the inventory through ad exchanges, Demand Side Platforms (DSPs), agencies, or directly.

What is the difference between an SSP and a DSP?

The main difference between a DSP and an SSP is that they connect to different segments of the programmatic advertising environment. Advertisers use a Demand Side Platform (DSP) to arrange their ad buying, while publishers use a Supply Side Platform (SSP) to manage and sell their ad inventory.

What Is A Data Management Platform (DMP)?

A Data Management Platform is a centralized system for gathering and organizing first, second, and third-party audience data. It is used by agencies, publishers, and marketers to improve ad targeting. It is crucial that publishers use an IAB-registered Consent Management Platform (CMP) to comply with GDPR and CCPA. This empowers users to decide on the level of ad targeting they are comfortable with.

What Is the Google Ad Exchange (AdX)?

 

Google AdX (formerly known as DoubleClick Ad Exchange) is a programmatic advertising exchange for premium ad inventory. Google AdX uses real-time bidding (RTB) to set the price of digital advertising space. It functions similarly to a stock exchange in that advertising space is freely traded in an open market. Publishers can access this market through a Google AdX partner.

For publishers, Google AdX provides a real-time marketplace where they may sell ad space to various advertisers. Publishers keep control over which ads appear on their sites and receive information on who bought their inventory and for what price. To gain access to Google AdX, publishers need to comply with Google's guidelines and have at least five million monthly pageviews. Publishers that do not meet Google’s traffic criteria, can also gain access to AdX through Google’s Multiple Customer Manager (MCM) program. As an approved MCM partner, Snigel can help you gain access to Google AdX. Get in touch with our team to find out more.

AdX offers advertisers a simple solution to scale campaigns or target specific demographics because a wide range of ad inventory is connected to the platform. Advertisers can also profit from real-time bidding, which allows them to bid for ad space based on how valuable an impression or user is to them.

Why Programmatic Advertising is Important for Advertisers

Before programmatic advertising, it was difficult for advertisers to access ad inventory. As a result, more than half of all available ad space remained unsold. Programmatic advertising solved this problem by making the ad space much more accessible.

Here are the top advantages of programmatic advertising for advertisers:

• The ability to grow. Instead of being limited by a small pool of ad inventory, programmatic advertising allows advertisers to reach a broad audience by purchasing ad space from a wide range of ad inventory.
• Flexibility in real-time. Advertisers can make real-time changes to their ads and use a wide range of targeting parameters.
• Capabilities for targeting. Through targeting, the process is more streamlined, and more relevant advertisements are served to users. An advertiser's budget can be put to better use and spent more efficiently with improved targeting. ‍
• Efficiency. The elimination of negotiating face-to-face deals makes programmatic advertising transparent and faster than traditional advertising. Additionally, advertisers can obtain a greater return on their investment by accessing a vast pool of publishers.

How Much Does Programmatic Advertising Cost?

Programmatic ad impressions are typically traded on a CPM basis, which means cost per 1,000 ad impressions. On average, programmatic CPMs range from around $0.50 to $2 CPM. However, prices vary by industry, device, format, and placement on the page. In addition, the listings quality and targeting level influence pricing. The higher the inventory quality, or the more specific you want to be in your targeting, the higher the price.

Programmatic advertising shows a considerable cost benefit compared to human-driven trading, which generally sees CPM prices around $10+. Therefore, programmatic advertising can help marketers stretch ad budgets 10 to 20 times further.

Why Programmatic Advertising is Important for Publishers

Programmatic advertising protects publishers and allows them to keep their visitors in mind by serving relevant ads. They can also use multiple types of bidding, such as header bidding and exchange bidding, to make deals that bring them higher profits and maximize revenue.

Here are the top advantages of programmatic advertising for publishers:

• Simplicity. Selling ad space has never been easier, thanks to programmatic advertising. Publishers can improve their ad sales with automated technologies that reduce the time it takes to identify and contact advertisers.
• Communication. Publishers can easily interact with advertisers and collaborate with them, guaranteeing both the publisher and the advertiser profit.
• Relevancy. Programmatic advertising increases the targeting capabilities for advertisers. This ensures that relevant ads are served to the publisher’s audience, which in turn generates affordable business leads for advertisers.
• Efficiency. Programmatic advertising lowers costs and increases margins, allowing publishers to make more money from their available ad space.

Is Programmatic Advertising Right For My Website?

Programmatic advertising is steadily growing, and considering current advertising trends, now is an excellent time to improve your website's programmatic advertising setup. Snigel helps publishers identify which programmatic advertising setup works best on their site and access premium ad inventory from the world’s largest brands. Snigel has over ten years of experience in the programmatic advertising industry, and our team of experts is happy to answer any questions you might have. Get in touch to receive a free assessment.