Google AdSense announced last week that ad bidding was being transitioned to a first-price auction.
Advertisers had been subject to the second-price auction since the early days of online display advertising but slowly many platforms have switched to using the first price of the auction winner.
While the official announcement from Adsense stated that it requires “no action for you” and that “you will likely not see a change in your earnings,” we wanted to post this blog to cover what might actually happen to your Google Ads.
First-Price Auction vs. Second-Price Auction
If you’re new to Google Ads or your campaigns have been on autopilot up until now, you may have never heard of first-price auctions and second-price auctions.
It all gets pretty technical but basically, it’s how AdSense determines the price you pay for ads.
Companies will create display ads in the Google Ads Manager. These ads will go to a bid in AdSense and the final price will be set based on who wins the auction.
Previously, ad rates were set by the second-price auction. This means that AdSense would use the price of the second-highest bid. Why would they do this?
Using the second-price auction was one way to keep costs lower and help out smaller businesses.
Imagine there’s a bid for sneaker advertisements on Google. A huge company with an astronomical budget could throw down $100 as a bid because it’s only a tiny share of their revenue and they’ll likely make it back with sales.
But, a small mom-and-pop sneaker store may only be able to bid $5.
It used to be that whoever won the bid would only pay $5 because they would use the second-highest price.
Under this new model, the highest bid of $100 would be used regardless of who won. The huge company had inflated the price to increase their chances of winning.
Why Does This Change Matter?
Now let’s get into the details about how this change could be damaging to businesses with smaller budgets.
No one wants to admit this but the use of first-price auctions will increase prices for everyone. Remember, they could start charging the $100 ad instead of the $5 ad.
On top of that, the change could be disastrous for smaller businesses that don’t have an effective bidding strategy in place. Some of them may be managing Google Ads on their own and not paying much attention to their bids.
If they aren’t carefully examining bids, they could see ad charges go through the roof and begin to eat away at their limited budgets.
According to AdSense:
“This will help advertisers by simplifying how they buy online ads and make it easier for them to buy your ad space sold on AdSense.”
They also said the switch was in line with what other platforms have already done.
“We believe this will help grow advertiser spending confidence in digital advertising and an increase in spending confidence over time will benefit publishers (that’s you).”
AdSense stated the changes will be effective at the end of the year. Publishers stand to make higher revenues as a result.
Preparing for First-Price Auction
Here’s the big question most of our clients will ask: how can I prepare for the switch to first-price auction?
The true effects of the first-price auction won’t be felt until 2022. In the meantime, businesses running Google Ads should begin scrutinizing their bids.
They need to get used to having precise control over their ad bids, studying their bids within the Google Ads Manager, and sorting through data to find out what’s working.
If these online businesses don’t want to start wasting their ad dollars, they need to build an effective bidding strategy. This includes considering ad goals and deciding whether to focus on conversions, clicks, or visibility.
Build Your Winning Bidding Strategy
Do you need any help with developing a bid strategy or managing your Google Ads?
HOTH PPC is our pay-per-click product that helps clients of all sizes earn a higher ROI.
Just because you’re a smaller business doesn’t mean you can’t stay competitive in first-price auctions.
It only means you’ll have to take a long, hard look at your bids. We can help with that!
Our expert team of Google Ads certified marketers can help you to create a bid strategy and walk you through every step of building effective Google Ads.
All you have to do is book a call with us today to get started.