Media Buying

Media Buying 101: What is an Ad Exchange?

Last updated on May 18, 2018 by Xavier Santana 9 min read

Table of Contents

Introduction

Advertising as we know it is not a recent invention.

In fact, it’s been around for a little over a century, with the first ads populating the pages of early 20th century newspapers and pamphlets.

The first marketers, or admen as they were known, were a special breed of people.

These guys were highly revered by the business owners and financial experts for their seemingly magical ability to bring in additional revenue.

The ads of today are vastly different, both in form and style of those early marketing efforts.

Even so, as technology progressed, our ad-trading methods have remained largely the same.

Until the past decade, that is.

Today, over 80% of shoppers do online research before they purchase anything, and over 40% go directly to Amazon to look at the products they wanna purchase before making a decision.

It’s almost unimaginable for a successful business not to have an online presence.

And guess what?

In order to be a more efficient digital marketer, we had to start taking advantage of the latest technologies such as ad exchanges and ad networks that help us trade and manage online media inventory for both advertisers and publishers.

The Importance of Media Buying

This change in the marketing landscape was aided by the development of new, semi-automated ways of trading media inventory, typically known as programmatic advertising.

In some areas, such as search results ads, the programmatic method has been used for a long time.

The more traditional formats have been more resistant to change, though.

Display ads that are found on websites in the form of banners and videos had been traded in a more traditional way at first.

This old school way means that publishers and advertisers communicate through their sales departments and marketing representatives and agree on terms.

Which terms?

Aspects such as volume, length of campaign, target demographic, size (or airtime length) of an ad, and so on.

Unlike traditional marketing, where you’ve gotta use these manual methods of ad negotiation, digital marketing allows you to automate the process.

Why is that, you ask?

Because you can now quantify and measure a large number of factors that are either super complex or even impossible to define and track.

This automation allows for both fewer errors and less costs, and the oldest members of this programmatic family are ad networks, followed by ad exchanges.

To understand the importance of ad exchanges and ad networks, consider how big of a role online marketing now plays worldwide:

Nowadays, according to Zenith Optimedia, online (mobile and desktop combined) marketing ad spend accounts for around 32% of the global value.

This means it’s second only to TV ads, which account for 39% of the global value.

More importantly, estimates show that online will surpass TV ad spend in 2018.

In the year 2018, online will account for a whopping 38%, compared to the diminishing 35% of TV ads share.

These numbers paint a picture that has become pretty clear in the past decade or so:

The value of online media buying and marketing is already significant and it’s rising rapidly.

Programmatic buying has been developed as a response to a rising need for a more efficient way to trade online ad space largely due to this rapid increase in volume and traffic.

And guess what, bro?

It’s the fastest growing online marketing channel today.

Which finally leads us to the topic at hand!

What are Ad Exchanges?

As in every transaction, media buying has two parties and deals with specific goods that are traded.

In this case, sellers are publishers who offer their media inventory to buyers, generally known as advertisers.

Media inventory is a bit of an abstract term, but it simply means the ad space that the publisher has to offer.

Back in the old days, this would simply be a space on a newspaper page, or TV commercial time at a certain time of day.

In the online world, though, there are two parameters that we need to consider:

the space itself, in the similar way that it’s done in traditional marketing
the interaction with the ad, which is unique to digital marketing

In the simplest case, we talk about impressions, which is the number of people who’ve seen the ad.

One impression is one view on one page per one person.

However, there are other models that are often utilized – per click and per action (subscription, form-filling, sales, etc.)

Obviously, in the traditional trade model, impressions are bought in bulk, typically per 1000 (this is also known as CPM, or cost-per-mile.)

With the development of ad exchange networks and real-time bidding, more flexibility has been introduced.

This allows us to target the ideal prospects more precisely.

This, in turn, increases ROI for advertisers, and conversion rates for publishers.

In order for this to be possible, several things need to happen:

there has to be some sort of a database of publisher inventory that advertisers can buy from
this database needs to be simple for publishers to supply their data which also needs to be somehow verified
there has to be a way for advertisers to choose what inventory they’re interested in, and how much they’re willing to pay for it

This is where advertising exchanges come into play.

They’re basically intermediaries between suppliers (publishers) and buyers (advertisers.)

They act as platforms where publishers and affiliates post their available inventory and the minimum price they’re willing to sell it for (usually known as “floor price”.)

While inventory can be bought and sold in bulk and through one-on-one negotiation between the publisher and the advertiser (usually known as programmatic direct marketing), what sets exchanges apart from old-school negotiation among sales teams is the process of bidding for impressions.

Ad exchanges effectively create an interaction with the supply side and demand side independently.

This means that humans from both sides go through an automated, computer-controlled process that allows for fewer errors and greater efficiency in the trade negotiation.

Now that you’ve read this ad exchange definition, it’s time to understand how these platforms work!

How do Ad Exchanges Work?

The underlying principle behind an advertising exchange is fairly simple.

Even so, there’s a complex number of moving parts and concepts that have to be taken into consideration for this technology to be fully grasped.

First of all, there’s often a bit of confusion regarding the difference between ad networks and ad exchanges.

A digital ad network is a company that aggregates inventory from publishers that sign up for it, and then offers the inventory to the advertisers with a markup.

This markup is essentially a way for these platforms to charge for their services.

Ad exchanges are an evolution of this process, and are often built around the inventory from a number of ad networks.

Nevertheless, they allow for a much greater flexibility when it comes to the trading of individual impressions.

Publishers usually connect to an ad exchange through something that’s known as an SSP, while advertisers do something similar on their end through a DSP.

When an advertiser wants to buy some inventory, they enter a real-time bidding process in which they offer their maximum cost-per-impression for inventory which satisfies certain parameters that they’ve selected beforehand.

Whenever new inventory is available, all the potential bidders are taken into account and the highest bid wins.

The whole process takes only milliseconds, and repeats itself every time new inventory becomes available.

On the publisher’s side, it looks something like this:

Whenever a visitor comes to a page, an action is started for all the inventory on that page.

Each banner and ad position is gonna be considered as a separate impression, and each subsequent page that the visitor goes to is a new impression for each of the possible ads.

Based on the information on the visitor – collected from website cookies and their browsing habits – the bidders who are more interested in the available inventory will be chosen.

The highest bidder wins, and their ad is shown on the particular website.

The cost of the ad is deducted from the advertiser’s account and added to the publisher’s account.

In order to protect publishers, an online advertising exchange usually features an option to set up the minimum cost for inventory.

If no bidder is available at the time (which is very unlikely) the auction is refreshed until one of them satisfies the criteria.

Since advertisers can tailor their bids by using a relatively wide number of parameters such as age, geolocation, niches, previous sites visited, and so on, this method allows for them to get the most out of their ad.

On the other hand, visitors are generally less annoyed by ads, because they represent something they might be interested in, and their experience on the website is much better, making this a win-win for both sides of the media buying process.

It’s important to understand that this means that media inventory in ad exchanges is not a static thing – the inventory sold corresponds to ad impressions, not ad positions and size.

While ad exchanges allow for the bulk sale of impressions, usually in bundles of 1000, this real-time bidding process makes up the core of what makes ad exchanges so powerful.

SSPs, DSPs, and the Future of Ad Exchanges

If ad exchanges are one step further from ad networks, the same could be said for SSPs and DSPs when compared to ad exchanges.

In essence, these platforms aggregate information from a number of ad exchanges, making up a sort of an ad mega-market, and they also use special proprietary algorithms to buy and sell ads.

They combine the flexibility of ad exchanges with the aggregation service that ad networks provide.

While exchanges were present even before real-time bidding took hold, Supply-Side and Demand-Side platforms are solely reliant on RTB.

These systems are more dynamic, and allow for an even more precise targeting of the audience that sees the ad.

Demand-Side Platforms communicate with advertisers and show them what inventory they might be interested in.

Supply-Side Platforms allow publishers to define their inventory and set up base prices.

Online ad exchanges allow for more flexibility and optimization of your ad campaign on the fly, while ad networks offer more specific, static trading options.

New Supply-Side and Demand-Side platforms offer the best of both worlds.

For example, Google AdSense is an ad network, in which Google directly works as an intermediary between the publishers and advertisers.

On the other hand, ad exchanges and corresponding platforms act in a more democratic, self-organized way, making their operation a bit more transparent and straightforward.

The new system has been proven to be so effective that most exchanges and networks nowadays either include SSP and DSP functionality in their services, or are completely switching to the new model.

How Can You Use Ad Exchanges to Your Advantage?

If it wasn’t already obvious, affiliate marketers can benefit greatly from using an ad exchange platform and SSPs.

These systems allow for you to leverage more money out of each individual impression and visitor of your site, therefore increasing your revenue.

It should be noted that ad exchanges and RTB are not only limited to traditional display ads.

They work with mobile, native, and in-app and in-game ads as well, which means that any kind of website or service can benefit from this.

While utilizing these services might increase your revenue, it’s more important that you can optimize your site around the strengths of these platforms.

Since they offer very powerful targeting options for advertisers, affiliates can focus on more specialized niches – even smaller sites with lower traffic can generate more revenue.

If you bear this in mind, you can build your site and content around your ideal buyer persona and increase conversion rates which would allow you to compete with much bigger and more established sites in your niche.

Ad Exchanges: Possible Issues

Of course, nothing is perfect and there are possible issues that can arise.

For one, fraud is always a risk, so you have to be wary of all the networks and exchanges you sign up for.

Be sure to check their end user agreements in case there’s some troubling small print.

In addition, there have been some issues with targeting, where ads from large brands showed up on hate sites and other sorts of unsavory pages.

However, improved algorithms have greatly diminished the impact of this issue.

Conclusion

Now that we’ve been able to define ad exchange and that you clearly know how ad exchanges work, you’re ready to take advantage of online marketing’s promising potential!

Even with that caveat, ad exchanges and programmatic advertising are taking over the online marketing world.

By recent reports, over 60% of B2B companies are using programmatic advertising in their marketing campaigns today, and the number is quickly rising.

Even if you’re not sold on the idea that a flexible bidding system can increase your CPC and CPA, the fact of the matter is that these technologies are very soon going to be unavoidable.

Meaning?

You should become acquainted with them as soon as possible, if you want your affiliate business to grow and prosper!