How Ad Exchanges Work

I came across a great article by Josh Dreller in iMedia Connection not too long ago that gives a straightforward explanation of ad exchanges. In a nutshell, Josh states that more and more online inventory is being purchased via ad exchanges – platforms allowing advertisers to bid on impressions.  As with paid search, exchange ad inventory is determined by what the market is willing to pay.

Because most of the transaction is automated, exchanges are very efficient for publishers to monetize previously unsold inventory, and for advertisers to buy inventory without middle men inflating costs   The entire process takes less than one-third of a second and goes like this:

An online user opens a publisher’s site.

The site’s ad server recognizes an open ad space and puts it up for bid on the exchanges the publisher has contracts with. A bid is submitted and won by an advertiser.  It’s important to note that advertisers are not manually bidding on every impression in real-time.  Just like paid search, advertisers choose targeting settings and a maximum bid for what they are willing to pay.  They can then change bids and settings to optimize the schedule on an ongoing basis. Bids are generally handled on a CPM level with the most common types of targeting being contextual and demographic.  For example, an advertiser could create a campaign that just targets automotive-related sites in California and bid accordingly for that traffic.

The exchange then sends the ad to the publisher’s ad server and the server loads whichever creative version is deemed appropriate for the situation.  For example, if it detects the end user is in Texas, there may be a specified ad to be served to that user.

The ad is served! Remember, the entire process has to happen virtually instantaneously to ensure a quality experience for a website user.

Currently there are only a handful of major ad exchanges including Ad Brite, AdECN ContextWeb, and DoubleClick. DSP’s (Demand-side platforms) such as Turn, Invite Media (Google), MediaMath and Triggit have also appeared to help advertisers manage all of the exchange campaigns through a single interface.

Based on their increased efficiency, the market share of exchange vs. traditional online display buying methods could grow quickly over the next several years. And, while not all inventory can be sold this way, it seems likely that these technologies will evolve with even more powerful capabilities in a very short time.

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