The world of digital marketing is extremely complex, and AdSense plays quite a vital part in the equation. Before explaining how advertisers buy inventory, it's important to understand what the ecosystem looks like at a high level. There are thousands of companies that provide some sort of service or added value inside this ecosystem, so to keep it simple, I'll stick to mostly Google products as they more or less have a complete ecosystem on their own. And also skip some of the more advanced service providers such as verification platforms and audience aggregators.
The major components of the ecosystem
The diagram below is a high level view of how all the different parts interact:
The most important things to understand here are that:
- Advertiser budgets live in the “buyside” products.
- The users and inventory available to show ad space on live in the “sellside” products.
- Ad exchange is auction based, meaning the highest bidding ad wins and is shown to the end user.
Now there are hundreds of use cases of how advertisers buy inventory, there are different publisher segments and traffic slices, and many many factors that affect the ad auction. For simplicity, let's take the example of how Google ads advertisers buy on AdSense through the display formats (i.e. let's leave search ads out of the equation), as this is probably one of the easier flows to explain.
Google ads
Advertisers will have certain business goals that they're attempting to reach. For example, an online shop selling a product will basically have the goal to sell more products at the cheapest cost to marketing. Or an app developer will want the most app installs at the cheapest marketing cost. Others may simply want to get eyeballs on their brand. No matter what the goal is for the advertiser, they will optimize their ad campaigns towards one of the following:
- Conversions - users landing on a site and performing a certain action (e.g. purchasing an item, filling in a form, installing an app, etc)
- Reach - target as many users as possible, usually meeting a certain demographic
- Engagement - where the user interacts with the ads in a meaningful way
There are also many ways in which advertisers pay for ads. The most common being CPM, where advertisers pay for each time their ad wins in the auction, regardless of what happens afterwards. However Google ads is a little different here, usually charging advertisers for clicks on their ads (also known as CPC - cost per click). This means the advertiser pays a fixed amount for each user that lands on their site. Depending on what the advertiser considers to be a conversation (e.g. the user completed a purchase flow), they can instruct Google to optimize for that. In addition to this, a value can be added to conversions (e.g. the value of the goods a user purchased), allowing Google further flexibility to optimize.
Ad exchange
Ad exchange processes advertiser bids incoming from many places including Google ads, DV360, and the collection of buyers that participate in the Authorized Buyers product. As mentioned before, the highest paying bid wins, and furthermore the advertiser pays the second highest bid price (the clearing price). This is known as a second price auction. Google Ad Exchange is one of the last exchanges operating under a second price model, and is currently working on updating this to become a 1st price auction. This means advertisers pay what they bid instead of the clearing price. This is actually quite a major change and a rather sensitive topic in the industry so I may set aside a dedicated post for this in the future.
AdSense
Adsense is one of the most popular ad networks out there. It's intended to be simple and is currently undergoing major changes to make it more automated and optimized. It's mostly aimed at publishers who want a plug and play solution to monetize their content but also offers certain ad products that are more advanced such as:
There are some additional older products that are less known and may be longer be supported such as Adsense for Domains.
The whole idea is that publishers offer up their content for advertisers to programmatically serve ads next to. The earnings help create more content, which brings users that ultimately advertisers want to engage with.
There are essentially two methods in which a publisher can offer up ad space for sale:
- Ad units - where publishers create individual blocks, place the code in a specific part of their page and it starts showing ads in that space. Publishers are responsible for all optimization work if they use fixed size ad units, or can outsource the ad unit size optimization to Google if they use responsive ads
- Auto ads - the simplest integration on offer. One piece of code is added to the <head>, Google scans and understands the structure of the page, finds suitable locations for ads and inserts them automatically. Google also continuously improves the “understanding” part of the equation to find better ad locations, sizes and formats. This site uses Auto ads.
There's a lot more to be said on ad implementations, manual optimization work and other best practices with AdSense. But will leave that for future posts.
Ad targeting and bidding methods
By now there should be an understanding of where budgets live, how the auction works at a high level, and how publishers offer up ad space for advertisers to buy.
Now let's dig deeper into how the buying actually happens by shedding some light onto the targeting and bidding methods (that also appear as reports in AdSense).
Advertisers target users and ad space, and make bids according to their business goals
Targeting methods
There are essentially four main targeting types:
- Personalised - where demographic information such as interest topics, location, or advertisers custom audience lists are used.
- Contextual - where the ads are closely matched to the context of the page they appear on through the use of keyword matching
- Placement - where advertisers specifically target a site, ad unit or collection of ad units. This is a dying form of targeting as it doesn't scale for advertisers and is difficult for them to maintain (meaning there's a lot of manual work involved to set it up and keep it up to date).
- Run of network - this type of targeting comes with the least criteria and is intended to help advertisers reach users that may have otherwise been outside their radar. It's safe to say not much budget is spent here.
The most common and higher value (from the average bid value perspective) being the top two. You may be wondering why AdSense even allows lower value targeting methods and doesn't just rely on personalised and contextual ads. The reason is because those ads aren't always available for all users. And even when personalized or contextual ads are available, due to the fact that AdSense operates on a second price auction, placement or run of network ads can help by serving as the second highest bids to increase the clearing price.
Bidding types
When advertisers have found the ad space and/or users they wish to engage with, they essentially have three ways to bid for them:
- CPM - where advertisers pay each time the ad is shown (regardless of whether or not a user saw it), and it's the responsibility of the buying system to optimize towards the advertisers business goals. This type of bidding is more common outside of Google ads
- CPC - where advertisers pay each time the ad is clicked, and it is the responsibility of the buying system to ensure the ads are shown to users who are most likely to click
- Active view CPM - similar to CPM, with the notable difference that advertisers only pay when the ad was shown and seen by users (read here for the definition of “seen”)
Publishers don't have control over this, but similar to above, it is important that all these bidding methods exist and are included in the auction because it allows more advertisers to participate. Because all these bidding methods are different, it's not possible to run one auction where advertisers bid differently. It would be the same as saying that in a car auction, some people can bid money, some can bid after they've driven the car and others can bid with bananas. So the way the auction mitigates this is by converting all bids into an estimated CPM bid (eCPM), so that all bids are on equal footing and essentially speaking the same language. And of course, the highest bidding ad wins the auction and is shown on the site.
This explanation only looked at a very specific part of the whole ecosystem, but like always, hope it was useful!