What is Real-time Bidding and How Does it Actually Work?

What is Real-time Bidding and How Does it Work?
Real-time bidding (RTB) is being touted as the future of Internet advertising. We shall find out what RTB is, and examine how it actually works.
Real-time Bidding (RTB) Vs. Programmatic
RTB is a form of programmatic advertising. However, some programmatic advertising allows publishers to sell their inventory at a fixed price instead of auctioning it. They are called programmatic direct or programmatic guaranteed.
You can't sell earrings to a pigeon. The traditional method of online advertisement forced advertisers to purchase online advertisement slots at fixed rates, based mainly on the number of views. However, without any concrete means of knowing in advance who would be viewing their Ads, many times resulted in earrings being advertised to pigeons, who obviously didn't buy them. As such, even with the best strategy and campaigns, advertisers used to lose a sizable amount of money on frivolous and non-productive advertisement.

To remedy this situation, the process of real-time bidding was introduced. It provides advertisers the capability of learning valuable details about the viewers of their advertisement, so that they can better decide if spending on these Ad impressions is worth it or not. RTB also has the potential of helping the Ad publishers obtain the best prices for each impression that they display on the website. In the following lines, we shall find out more about RTB, and study its working.
What is Real-time Bidding?
Real-time bidding is a process through which Ad impressions on websites are sold to advertisers. RTB makes use of a programmatic instantaneous auction, which happens in real time.

In real-time bidding, all the advertisers bid for an Ad impression every time a page loads, and the one with the highest quoted price wins the particular slot on the publisher's website. Thus, RTB is a dynamic, real-time process, which makes it possible to bid on a per Ad-impression basis. This is in contrast to the traditional static advertisement methods, which involved bulk purchases of several thousand impressions.
Elements of RTB
The following are the four key elements that are part of each RTB transaction.
The Advertiser: The advertiser is any person, organization, or agency that wishes to place their advertisement on a website in order to target potential customers. The ultimate aim of any advertiser is to increase business and gain profit.
The Publisher: The publisher is the one providing the inventory that is being auctioned. The inventory typically comprises the total amount of advertisement space that the publisher has available on his website, which he wants to sell to the advertiser.
Ad Exchange: This is a software which connects the advertisers to the publishers, and establishes business between them by facilitating the RTB transaction. It is responsible for carrying out the actual process of real-time bidding within the small time-interval (measured in milliseconds) that it takes for the publisher's website to load after a visitor accesses it.
Page Impressions: This is one of the most important factors which decides the value of a publisher's inventory. Simply put, a page impression is one user looking (not necessarily clicking) at one ad. Thus, the more page impressions that the publisher's website has, the more money he/she can demand for the available Ad slots on it.
How Does Real-time Bidding Work?
The process of real-time bidding begins when a user opens up a website on his browser. This immediately generates a bid request, which comprises viewer-specific information, such as his location, browsing history, etc. This bid request is then sent to an Ad exchange server, which distributes it to multiple advertisers who have provided their inventory information to it. Finally, the auctioning begins.

During the auction, each advertiser bids his highest price for the Ad slot on the website. The advertiser who quotes the overall highest amount wins, and his advertisement is immediately sent to the user-end, and loads on the website. This entire process completes in a matter of milliseconds. Therefore, in order to be able to bid within this minute time slot, advertisers make use of a demand-side platform (DSP).

The DSP is a software system which provides a single interface, through which an advertiser can manage several different Ad exchange accounts. It also allows advertisers to make use of key performance indicators, such as effective Cost per Action (eCPA) and effective Cost per Click (eCPC), to analyze and optimize their bids and pricing, to better target potential customers. Thus, DSP makes it possible for advertisers to determine the value of an Ad impression (typically in less than 100 milliseconds), and bid more efficiently.

For example, if a company 'BestPhones' finds that a user had previously visited their website, and was looking at a particular smart phone model, it will mark him/her as a potential customer, and would be willing to pay more than other bidders to gain an advertisement slot on the website that this user is visiting.

Some publishers also tend to use Supply Side Platforms (SSPs), which again are software systems that are designed to help manage their inventory.
Benefits of RTB for Advertisers
The most important benefit of RTB is that, owing to it, advertisers no longer need to work directly with the publishers in order to negotiate the price of a particular Ad impression. Instead, they can make use of Ad exchanges and other similar advertisement technology, and access a wide range of inventory across several different websites on the Internet.

Furthermore, through the use of dedicated systems, they can carry out detailed analysis of the available Ad impressions, and much more effectively pick out the ones that are most likely to help them attract potential customers.

Thus, through the use of RTB, advertisers can bypass the inefficient human elements, and more accurately target potential customers. This has the dual benefit of increased profits, as well as significantly reducing unnecessary spending on non-productive advertisements.
Benefits for Publishers
There have been speculations that RTB results in advertisers paying the publishers less for their inventory. However, most Ad exchanges and SSPs allow publishers to set the minimum prices (price floors) for their inventory. Thus, publishers are able to participate in the RTB process while setting a minimum price, that must be provided by the advertisers for the transaction to happen.

Also, since the RTB is based on the 'highest bidder wins' principle, if the page impressions are significant, publishers can obtain much higher values than what would have been possible if the traditional system, which uses a set value of advertisement inventory, would have been used.