In recent years, the surge in advertising technologies has inadvertently reshaped the way programmatic advertising operates. This rapid development has posed challenges for many publishers in keeping up with trends, and platform updates, and especially in optimizing ad revenue. These are exacerbated by limited resources, despite the technological advancements.
One critical factor in maximizing ad revenue is implementing an effective price floor strategy. However, not all publishers can accurately define what a price floor is. And in this blog we’re going to discuss just that. Additionally, questions related to this topic, such as how to create an effective price floor strategy and the different types of price floors, will be clarified in this blog.
What is Floor Price?
In programmatic advertising, a floor price (or price floor) is the minimum bid amount that a publisher sets for their ad inventory. The primary purpose is to ensure that the ad inventory cannot be sold below a predetermined price, allowing publishers to maintain or even increase their revenue. Depending on various factors such as ad placement on the webpage, audience value, or overall demand for the ad inventory, the floor price can be customized at different levels.
It’s important to recognize that if a publisher does not use floor price, the value of the ad inventory may decline substantially over time.
In the past, ad exchanges used second-price auctions, where the highest bidder paid the second-highest bid. But recently, there has been a shift to first-price auctions, where the highest bidder pays their bid amount. And this led to bid shading.
What is Bid Shading?
Bid shading, a tactic where buyers aim to acquire ad impressions at the lowest possible cost, has become more common as a result of this change and can severely impact publishers’ revenue. Most crucially, establishing a price floor helps prevent low-quality ads from appearing on the publisher’s site, thereby protecting the user experience.
How Does Floor Price Work?
The mechanism of a floor price is that it sets a minimum bid threshold that advertisers must meet or exceed to win an ad placement. When a programmatic auction occurs, bid prices are submitted by advertisers in real-time. Any bid lower than the floor price set by the publisher is automatically excluded from the auction. This mechanism not only ensures that their ad inventory is not sold below the minimum price they set but also protects the publisher’s revenue and maintains the value of their ad space.
By implementing floor price, publishers can better control their ad revenue and attract higher-quality advertisers who are willing to pay. However, carefully setting, monitoring, and adjusting the floor price based on market conditions and demand is crucial for publishers. Even large, professional sites view this as a crucial, long-term strategy. We’ll explore this in more detail in later sections of the blog. Overall, price floors serve as a critical tool in optimizing ad revenue and ensuring the profitability of programmatic advertising.
To make the function of floor price easier to understand, refer to the following real-world example from a news website.
A popular news website wants to maximize its ad revenue without compromising the quality of the content on their site.
This is how this website implementation works:
- Setting the Floor Price: After running a campaign and thoroughly analyzing the available ad inventory, the publisher concludes that the ads on its homepage above-the-fold (visible without scrolling) are the most expensive ones. This is due to their high visibility and engagement rates. Based on market demand and referencing other similar news sites, the publisher sets a floor price of $5 CPM (cost per thousand impressions) for this premium ad space.
- Programmatic Auction: Before the auction takes place for an ad to successfully appear on the homepage above-the-fold, several advertisers place bids as follows:
- – Advertiser A bids $4 CPM
- – Advertiser B bids $5.50 CPM
- – Advertiser C bids $6 CPM
- Auction Result: Because the publisher set the floor price at $5 CPM, Advertiser A is excluded from displaying their ad to the readers of this news site. On the other hand, the highest remaining bid, Advertiser C’s $6 CPM, wins the auction.
This example above illustrates how setting a floor price helps publishers protect their ad inventory’s value.
More to discover
CPM vs CPC: Which Is Your Better Choice?
Why High Floor Price May Not Equal High Returns
Some publishers believe that setting high CPMs will result in higher revenue so they decide to set high floor prices on their ad inventories to achieve this. However, high floor prices often do not correlate with high revenue.
The reason is that excessively high prices can deter advertisers from participating in auctions or bidding at all. While it may seem certain that high price floors ensure higher earnings per ad impression, this can also lead to fewer bids being accepted. This reduces competition and ultimately limits the total revenue potential.
A site with excessively high floor prices may cause advertisers to allocate their budgets to other websites selling ad spaces. However, setting floor prices too low is also not a wise decision so publishers need to research and find a balance between pricing and protecting ad inventories to maximize revenue.
5 Benefits of Setting a Floor Price in Advertising
Revenue Protection
The noticeable benefit of setting a floor price for publishers is that it helps protect the value of the ad inventory by ensuring that ads are not sold below a certain minimum price. This prevents underselling and helps maintain a consistent revenue stream.
Maintaining Ad Quality
A floor price helps exclude low-quality ads by deterring advertisers who are not willing to pay the minimum price. This ensures that the ads displayed on the site meet certain quality standards, enhancing the overall user experience. This is especially useful in the current context, where harmful ads and bots can take over ad inventory from publishers who set low floor prices or lack expertise in this field to profit off of the exploits. The floor price acts as a barrier to these malicious and fraudulent actors.
More to discover
How to Reduce Low Quality Ads and Improve User Experience
Flexibility in Monetization Strategy
Since floor prices can be set differently for various segments of ad inventory on the site, publishers can use this feature to create a reasonable monetization strategy. This allows them to maximize revenue from areas that have high demand while still offering competitive pricing for less sought-after inventory, and then optimize overall revenue generation.
Increased Negotiation Power
Having a floor price in place gives publishers leverage in negotiations with advertisers. This enables price discussions to be negotiated at better rates for prime ad placements such as the top of the page, leading to increased revenue opportunities.
Market Stability
The final noticeable benefit of a floor price in the list is that it contributes to market stability by providing a baseline price for ad inventory. A fair and transparent advertising market is generally created for both publishers and advertisers.
Exploring the Different Types of Floor Prices
There are three kinds of floor prices, let’s quickly review them.
Hard Floor Price
A hard floor price is a strict minimum bid that ads must meet or exceed to be considered in an auction. If the bid is below this price, it is automatically rejected 100% of the time. The purpose of a hard floor price is to ensure that no ad space is sold for less than this amount.
Soft Floor Price
Contrary to the above, a soft floor price allows for flexibility alongside the minimum price. The mechanism prioritizes bid prices that meet or exceed the floor price, but in some cases, bids below the soft floor may still be accepted. This type of floor price is used to encourage more bids while still aiming to achieve a higher average price.
Dynamic Floor Price
As the name suggests, a dynamic floor price can adjust in real-time based on market conditions, demand, and other factors. Because this type of floor price can automatically increase or decrease, it allows publishers to optimize their ad revenue by adapting to changing auction environments and maximizing the value of their ad inventory.
Strategy to Choose the Right Types of Floor Prices
Here are also 5 factors to consider when setting floor prices for publishers to make the best choice for certain situations:
| Factor | Things to Consider |
|---|---|
| Location | Set higher floor prices where advertisers are willing to pay more |
| Audience | Raise floor prices for sections that attract high-value advertisers |
| Ad Size | Set higher floor prices for ad units that perform better in terms of demand and engagement |
| Seasonality | Increase floor prices during peak advertising seasons or specific high-demand periods |
| Device | Consider higher floor prices for devices with higher conversion rates |
For instance, a news website with substantial traffic from the United States has set higher floor prices for US traffic due to advertisers’ willingness to pay more in that region. They also adjust floor prices higher in the evening since people have more time to read news in this duration. During the Super Bowl, the annual league championship game of the National Football League in the US, they increase the floor price for the sports section. Additionally, they optimize ad sizes by setting higher floor prices for 300×600 ad units, which outperform 300×250 units in demand and engagement.
Conclusion
No matter what adjustments you implement, keeping an eye on the progress is crucial. With the market constantly evolving, it’s essential to adjust your floor price strategy from time to time. Managing it requires significant time and effort because this is not a one-size-fits-all approach. So, get ready to fine-tune the floor price, or partner with Geniee and let us handle it for you!
Frequently Asked Question
1. Why do publishers set floor prices?
Publishers set floor prices to protect the value of their ad inventory, ensuring a consistent revenue stream, and maintain ad quality on their site.
2. How often should floor price be reviewed and adjusted?
Publishers should review and adjust floor prices regularly to keep up with changing market conditions, seasonal trends, and changes in demand. The frequency can vary depending on the site. For example, many publishers update their floor prices monthly but monitor them more closely during the holiday season.
3. How to determine the right floor price?
To determine the appropriate floor price for a site, publishers need to analyze factors such as market demand, ad placement visibility, user demographics, and historical bid data. Experimentation is also necessary to find the most suitable price instead of sticking to a fixed rate.
4. How can setting a floor price impact ad revenue?
Setting a floor price can increase ad revenue by preventing ad inventory from being sold too cheaply. Besides, setting the floor price too high might deter bidders and reduce the number of ads sold.
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