The work of an advertising auction on Facebook: Types and metrics

An advertising auction on Facebook is a process in which advertisers compete for the opportunity to show their ads to users.

When a person logs into Facebook, the system evaluates which ads to show based on several factors: the target audience, the budget of the advertising campaign, the quality of the content and other metrics. First, the system analyzes the advertiser's audience compliance with the selected target audience, including parameters such as age, gender, interests, behavior and location of users. Secondly, the maximum bid that an advertiser is willing to pay per click or display of an ad is taken into account. The third factor is the evaluation of the quality of the advertisement, including the level of engagement, the quality of the image or video, the text of the advertisement and its relevance to the interests of the audience. The system also predicts how likely it is that the user will perform a targeted action, whether it is a click on an ad, registration or purchase. Finally, historical data on the past effectiveness of advertising campaigns is taken into account in order to predict the success of the current one. As a result of the advertising auction, the system determines which ads will be shown to the user in the news feed, aiming to provide the most relevant and interesting content, while providing maximum value to advertisers.

In this article, we will look at how an advertising auction of a popular traffic source actually works, what types of auctions there are, as well as metrics that an arbitrageur can influence when trading with Facebook.

First price auction

A First-Price Auction is a type of auction in which participants bid on a product or service and the winner pays an amount equal to their bid. An important feature of this type of auction is that bids are made blindly, that is, participants do not know what amounts other participants have offered.

The auction process of the first price begins with the announcement of the auction. The auction organizer informs potential participants about upcoming auctions and describes the product or service that is being offered for sale. Then the acceptance of bets begins. All participants place their bets confidentially, without disclosing the offered amounts to other participants. This creates an element of uncertainty and makes the process more intriguing.

After the end of the time for accepting bets or reaching a certain number of offers, the acceptance of bets closes. The auction organizer opens all submitted bids and determines who offered the highest price. This participant is declared the winner of the auction. The winner pays his bet and receives the product or service.

Let's take an example. Let's assume that four people participate in the auction: A, B, C and D. Each of them makes a bet without knowing the other's bets. Participant A places a bet of $1,000, Participant B — $1,200, participant C — $900, and participant D — $1,100. When the auction ends, the auction organizer opens all bids and sees that participant B has offered the highest price — $ 1,200. Thus, participant B becomes the winner and pays $1,200.

The participants of the first price auction can apply various strategies to increase their chances of winning. It is important to correctly estimate the cost of a product or service and predict possible bids from other participants. Participants must find a balance between making a high enough bet to win and not overpaying for a product or service. For example, if a participant greatly overestimates the bids of competitors, he may overpay for the product, which will be economically unprofitable.

The first-price auction has both advantages and disadvantages. The advantages include the simplicity of the rules and the transparency of the process. The winner is known immediately after the bets are opened, and there is no need for additional stages to determine the winner. However, there are disadvantages. The main one is the risk of overcharging. Participants may overpaid, especially if they overestimated the bets of others. Also, participation in the auction requires a strategic approach and understanding of the market and competitors.

The first price auction is widely used in various fields.This type of auction is easy to organize and understandable for participants, which makes it a popular choice for many types of bidding.

Second price auction

A Second-Price Auction, also known as a Vickrey auction, is a type of auction in which the highest bidder pays the amount of the bid offered by the second largest bidder. The principle of operation of this auction is that participants place their bids blindly, that is, without knowing the bids of other participants. The winner is the one who offered the highest price, however, unlike the auction of the first price, the winner pays not his bid, but the second largest.

The second price auction process begins with the announcement of the auction. The auction organizer informs potential participants about upcoming auctions and provides information about the product or service that is being offered for sale. Then the acceptance of bets begins. All participants place their bets confidentially, without disclosing the offered amounts to other participants. This creates an element of uncertainty and makes the process more intriguing.

Let's take an example, four people participate in the auction: A, B, C and D. Each of them makes a blind bet. Participant A places a bet of $1,000, Participant B places a bet of $1,200, participant C places a bet of $900, and participant D places a bet of $1,100. When the auction ends, the auction organizer opens all bids and sees that participant B has offered the highest price — $ 1,200. Thus, participant B wins, but does not pay $ 1,200, but the second largest bet — $ 1,100, which was offered by participant D.

The second-price auction has both advantages and disadvantages. The advantages include encouraging fair bets, as participants tend to place bets closer to the actual estimated value of the product, since they know that if they win, they will pay the second highest bid. This also reduces the risk of overpayment, as the winner pays less than his maximum bet. However, there are disadvantages. The main one is the uncertainty of the bet, since participants do not know in advance which bet will be the winning one, which can create tension. There is also the possibility of strategic manipulation, where participants may try to guess the bets of others and offer bets that do not correspond to their true valuation.

In the context of advertising platforms, a second-price auction is often used to allocate advertising space. Advertisers place bids for the display of ads, and the winner pays the second highest bid. This encourages advertisers to offer bids that reflect their true estimate of the cost of an advertising space. The point of this approach is for advertisers to strive to offer higher bids, thereby increasing the revenue of the advertising platform. However, advertisers do not know exactly which bet is the winning one, which encourages them to offer the maximum amounts they are willing to pay.

The quality of the audience that the advertiser receives also depends on the bid. For example, if the bid is $1, the advertising platform may provide a less targeted or lower-quality audience. If the bid is $5, the advertiser is likely to get a higher-quality and targeted audience. There are cases when it is necessary to attract as many people as possible with minimal costs, for example, in the field of dating. In such situations, the advertiser may prefer to place lower bids in order to attract a large audience at minimal cost. However, in the case of more expensive verticals, where payouts are significantly higher, it is important to attract paying customers. Here, the volume attraction strategy will not work, and the advertiser will have to place higher bids in order to find the right and paying audience.

Thus, the second-price auction contributes to a more efficient allocation of advertising space and cost optimization for advertisers, while ensuring a fair and competitive environment.

VGS auction

VSG stands for Value Score System, which is a value rating system used in Facebook auctions. Unlike traditional first- or second-price auctions, Facebook uses the VSG auction, which takes into account not only advertiser bids, but also many other factors that affect the value of an ad to a user.

How the VSG Auction works:

Advertiser's Bid: As in other auctions, the advertiser's bid is an important factor. The advertiser indicates how much he is willing to pay for a click, impression, or other user action.

Evaluation of the quality of advertising: Facebook evaluates the quality of advertising by several parameters, how much the ad matches the user's interests, how likely it is that the user will click on the ad, comment on it or share it, how likely it is that the user will make a purchase or other targeted action after viewing the ad.

Rate and quality assessment: Facebook combines an advertiser's bid and an ad quality score to determine the "overall value" of an ad. This combined metric takes into account both the financial side (how much the advertiser is willing to pay) and qualitative indicators (how well the ad meets the interests and needs of the user).

Auction Winner: The ad with the highest total value wins. This means that even if the advertiser has a high bid, his ad will not necessarily win if it is of poor quality. Similarly, a high-quality low-bid ad can also win if its overall value is higher.

The price paid by the winner: The winner pays a price sufficient to surpass the second most valuable ad. This means that the winner does not always pay the maximum bet that he has indicated. In most cases, this reduces the actual costs of the winner, making the process more cost-effective.

Consider for example, two advertisers participate in an auction to serve ads to a user on Facebook. Advertiser A offers a bid of $3 per click, and advertiser B offers a bid of $4 per click. However, Advertiser A's ad has high relevance and engagement, while Advertiser B's ad has low quality scores.

Facebook evaluates the overall value of ads as follows:

Advertiser A: bid $3 quality 0.8 = 2.4 (total value)
Advertiser B: bid $4 quality 0.5 = 2.0 (total value)

Despite the higher bid, Advertiser B's ad loses out because its overall value is lower. Advertiser A's ad wins with a total value of 2.4. However, Advertiser A does not pay his maximum bid of $3. Instead, it pays a price sufficient to surpass the overall value of the second-ranked ad. Thus, he will pay a little more than $2.0.

Facebook's VSG auction system aims to optimize ad impressions, providing high value to users and efficient use of advertisers' budgets. It encourages advertisers to create high-quality and relevant ads that attract the attention and interest of the target audience. This system makes the auction process more fair and cost-effective, since advertisers pay only as much as is necessary to win, while taking into account the quality of their ads.

What metrics should I focus on?

There are many different metrics available on advertising platforms to assess the quality of traffic, but the main ones that an arbitrageur should know include the following:

CPM (Cost Per Mille) is the price per thousand impressions. This is a metric that shows how much a thousand impressions of an ad costs. It is important to strive to reduce this number in order to make advertising more cost-effective. For example, if the CPM is $10, it means that the advertiser pays $10 per thousand impressions.

CTR (Click-Through Rate) — conversion from impression to click. This is the ratio of the number of clicks on an ad to the number of impressions, expressed as a percentage. The higher this indicator, the more effectively the ad attracts the attention of users. Arbitrageurs strive to increase CTR, as this indicates the high attractiveness and relevance of the ad. For example, if an ad is shown 1000 times and clicked on 50 times, the CTR is 5%.

CR (Conversion Rate) — conversion from a click-through to a target action. This is the percentage of users who have completed a targeted action (for example, purchase or registration) after going to the site. The higher this percentage, the better, as it shows that the site and the offer on it are effective. For example, if 100 users visited the site and 10 of them made a purchase, the CR is 10%.

RR (Retention Rate) — user retention or returnability. This is the percentage of users who return and continue to use the product after a certain time after the first interaction. A high RR indicates that users like the product and they continue to use it. For example, if 40 out of 100 new users continue to use the product after a month, the RR is 40%.

ARPU (Average Revenue Per User) is the average revenue per user. This is a metric that shows how much one user brings in on average. It helps to evaluate the overall effectiveness of monetization. For example, if the total number of users is 1000 and the total revenue is $5000, the ARPU will be $5.

How can I influence metrics?

To influence key metrics of advertising campaigns, such as CPM, CTR, CR, and others, arbitrageurs can use a number of strategies and tactics:

Creative: Improve CTR. Creating attractive and expressive ads can significantly increase clickability and, consequently, CTR. This includes the use of vivid images, evocative headlines and texts.

Targeting: Optimization of CPM, CTR and CR. Setting up accurate targeting helps you reach a more relevant audience. This includes choosing parameters such as gender, age, interests, and geography that best match your target audience.

Landing page: Impact on CR. Optimizing the design and user interface of a landing page can significantly increase conversion. It is important to create an easily understandable and intuitive interface that simplifies the user experience as much as possible and reduces the number of steps to the target action.

Bidding: Impact on CPM, CTR and CR. Working with bid levels allows you to adapt expenses to the effectiveness of each advertising group or ad. This may include turning off expensive ads with low performance indicators and scaling those that deliver the best results.

Each of these strategies aims to optimize costs and increase the effectiveness of advertising campaigns on platforms such as Facebook. Understanding the relationship between these metrics allows arbitrators to make informed decisions and achieve better results when working with advertising budgets.