How do Ad Exchanges work?

Answer 1

Ad Networks and Ad Exchanges…What is an Ad Network? Ad Exchange? There is a lot of talk about what each one means, what the difference is between those two, which one is more effective to buy the online ads from. We are here to address these questions in this blog and make sure that we are all on the same page when referring to ad exchanges and ad networks. Let's start with defining these terms (applied to the digital marketing industry):

Advertiser - an individual or a corporation that places an ad in order to reach out to the potential/existing customers.

Publisher - an individual or a corporation responsible for posting/distributing digital ads.

Advertising Network (ad network) - a corporation that connects advertisers to the publishers. The main function of the ad networks is to match supply (the ad spaced offered by publishers) with advertisers demand. Ad networks aggregate publishers' inventory, segment audiences and then sell online ad impressions to the advertisers. Otherwise it would be very time-consuming for the marketers to run around collecting online inventory from hundreds of publishers.

Advertising Exchange (ad exchange) - a real-time bidding technology (as opposed to ad network - negotiating price on media inventory) platform that facilitates the buying and selling of online media advertising inventory from multiple ad networks.

Since we are now familiar with the definitions needed for understanding ad networks and ad exchanges, we can now look into how they operate, how they differ and what the advantages and disadvantages of each one are. Ad networks collect the data from the publishers, aggregate it and then segment it based on the selected criteria - behavioral, registration, gender, age and other. Ad networks will then sell these slices (for instance, women, age - 20-35, like travel) to the advertisers based upon their needs. Some of the advertisers may have a $1M budget targeting the group of people 18-25 who like Horror movies, the other might be interested in the groups with other behavioral patterns, demographic characteristics or any other criteria. Once the common ground is found and the sale transaction has taken place, the ad network will take 40 - 50% commission and give the rest to the publisher. There are certain drawbacks of this relationship for:

- Advertisers. Since the most relationships with ad networks are 'blind', the advertisers can't identify the best inventory because it is very hard to evaluate the performance at the aggregate level. As we mentioned earlier, the advertisers only get the information at a very high level knowing how the overall segment performed not having the visibility into the data at the domain level.

- Publishers. The publishers can't identify the best advertisers since there is no transparency into advertisers through ad networks.

- Ad Networks. It is extremely challenging to forecast inventory therefore overselling or underselling may occur.

An ad exchange is a single platform on which publishers, advertisers and networks can buy and sell the ad spaces. Any publisher's unsold inventory is collected by the exchange and each impression is auctioned off to the highest bidder. How does it work? When a user visits a site, the publisher that owns the site sends the impression to the ad exchange requesting to sell the ad space presented to the buyers. This impression is being sent to the advertisers. The advertiser in turn has two options at this point:

- To look at every impression and determine the value and send the bid back to the ad exchange.

OR

- To set up a rule, say, to buy sport inventory in NY with a bid $ 1.40. The highest bidder wins.

An ad exchange has the following advantages:

- Direct connection between the buyer and the seller.

- The advertisers have more transparency into the domain's performance knowing exactly what is working and what is not. In addition, the advertisers are no longer committed to buy impressions with a pre-determined budget; the advertiser now manages the process of buying the number of highly qualified impressions.

- The publishers can now maximize revenue by allowing the advertiser to have a healthy competition for the ad spaces.