Oh, the CPMs outside are frightening… If you’re an advertiser, you’ve probably seen it. CPMs go up outrageous amounts, and your leads start to slow down. If you’re a retailer, sure you’re seeing sales, but at what cost? Why does this happen every year? Let’s explore how bidding algorithms work and how you can keep your budget under control in December.

How Do Bidding Algorithms Work?

AI-powered bidding is one of the most popular use-cases of AI for advertising, be it programmatic or social, but it can be hard to wrap around how it really works. Sure, you can put in your limits, what you don’t want to pay by CPM or what you don’t want to pay by click, and your DSP will just stay within that, but there’s so much more that goes on behind the scenes in the bidding algorithm.

The most prominent or widely known bidding algorithm is called “real-time bidding.” Real-time bidding refers to the way algorithms bid, optimize and place ads for advertisers. This all happens in a matter of seconds. The simple breakdown of how this works is as follows:

1. The algorithm estimates the value of the targeting setup. It will use signals such as competition, impressions, past performance (from other advertisers or data), users within the audience or value of the contextual content. It will then choose publishers or placements that fit within those standards.
2. The algorithm will then enter a bidding war. At this time, the algorithm assesses publishers that fit the criteria or goal set by the advertisers. The publishers typically provide a bid floor which is the lowest cost that the publisher will accept. The algorithm will decide an acceptable bid.
3. If the bid is not beat out by another advertiser, the ad will be placed on the website and charged per thousand impressions.
4. The Algorithm uses machine learning to learn from each of these interactions. It optimizes and calculates appropriate bids based on the goals set by the advertiser and the data it is able to ingest. The more data that can be fed to the algorithm (for example, if users added a product to the cart), the more likely it is to bid up or bid down appropriately.

Some algorithms can be customized, but usually they live and breathes within the DSP that runs it. For example, Google’s Smart Bidding can be set to 4 different strategies: maximize conversions, target CPA, Target ROAS and maximize conversion value.

What are the Positives and Negatives of smart-bidding or a bidding algorithm?

The positives are that the advertiser themselves do not have to place or make deals manually, saving time and effort. The negatives are the exact opposite. Since there is no one viewing what the bid floor is per publisher, some organizations may feel that the bidding algorithms lack transparency in cost. Another big downside is that an algorithm can’t optimize out of anomalies. For example, Holiday CPMs go up, therefore the algorithm may not be able to optimize within your CPM limits.

What is the Trend for CPMs for the Holidays now?

Consumer Acquisition predicts that CPMs will increase between 30-40% between Black Friday and the Holidays across social. This is a trend that reoccurs every November/December.

Why do CPMs rise?

CPMs rise during the holidays because there is more competition and more advertisers who are willing to pay more for placements. Advertisers are spending more money and with a similar amount of publisher space, it jacks the costs up. It’s like when California has a bad grape season, so grapes are more expensive for a year: supply and demand.

How Can You Keep Your Holiday CPMs Down?

The biggest advice we can give is to start your prep earlier. We’ve put together a comprehensive guide on Holiday Advertising.

Also, if you are not a retailer or selling a product, it’s recommended to monitor your budgets and assess your past performance during the holidays. You can also test into a new advertising format. On-Stream has lower CPMs and 2.3X higher CTR than display.

I’m a Publisher, Can I do anything?

Yes! Expand your ad placement opportunities. By doing this, you’ll not only increase the ROI on your videos, you’ll help to grow inventory during the holiday season. If you have videos on your site, you can do this without adding more mid-roll ads. Increase your revenue with one line of code from CatapultX.

Happy Holiday Advertising!