If you’ve been in the RTB programmatic space for longer than 30 seconds, you’ve come across the term “floor price”. Any time there’s a discussion of CPM price fluctuations, stability for publishers, ensuring Publisher’s inventory is sold at a good rate, etc. floor price comes into play.
While straightforward in theory, its execution is more complex. In this post we’ll go through how floor pricing works on a more granular level and the different considerations and evaluations that are made when establishing floor price.
What is Floor Pricing
Floor pricing is a protective algorithm mechanism used by publishers. It ensures ad inventory is purchased at a CPM rate that reflects the value of the website and is not driven down by bid shading or by an overabundance of inventory.
A floor price is the minimum acceptable price to purchase ad inventory. Bids below that floor are not considered and are dismissed by default. Prices at or above the floor price are considered and can win RTB auctions. If a floor price bid and a higher bid compete in an RTB auction, the higher one will win.
Why is Floor Pricing needed?
The need for floor price rose as the algorithm for programmatic buying became more sophisticated. Advertisers seeking the best inventory at the lowest price would bid low CPMs. Because it’s transacted programmatically without any person reviewing the transaction, the algorithm would accept the highest bid without consideration of what the bid was.
This drove down CPMs as advertisers consistently bid lower and lower for inventory that was worth more when evaluated independent of the programmatic process. Publishers were losing significant revenue in this algorithm loophole. Floor prices were introduced to remedy this issue.
A floor price sets a baseline price. If an advertiser wants the inventory, they need to pay at a minimum this rate, or they won’t win the auction. For publishers with quality content and users, advertisers are willing to meet the floor price and often pay more for the space. For low quality publishers, a floor price may leave them with little to no revenue.
It’s a smart solution that addresses the largest concern. It is not a perfect solution though as you’ll see, but it can be tweaked to reach near perfection.
In the end, floor prices serve a noble cause in keeping the two sides of a market on equal footing, with neither exploiting the other. Each one finds a balance that works for it in the floor pricing spectrum.
How is the Floor Price decided?
While the theory and explanation are simple enough, putting it into practice takes some technical prowess and thinking.
- First there’s the question of what should the floor price be?
- How to produce and test that number?
- How does the CPM of the floor price compare to when the site doesn’t have a floor price?
- What are the mechanisms and evaluation to consider when raising or lowering the floor price?
Yup, easier understood than done.
To start, every publisher needs to figure out their baseline CPM without any intervention. While making this calculation it’s important for Publishers to tabulate this on an ad unit basis, because every ad unit can command a different CPM; banner units and video units are apples to oranges.
Once that’s done the initial floor price is set to $.10. It’s a low number, but you don’t want to start too high and miss out on revenue. Start low and increase after each daily evaluation.
Floor prices are not applied across the board. There is always a percentage of traffic, usually around 10% that serves as a control that has no floor price. The purpose is to see the effectiveness of the floor price and where this is room for improvement.
How Floor Prices are Evaluated
The evaluation needs to take several things into consideration.
- Amount of requests
- Amount of impressions
- Floor Price (or not)
The number of requests is simply the number of ad requests sent to servers based on the amount of traffic the site received. It’s important to know that the number of ads requested is not the amount served.
Just because an ad was requested, the server may not return an ad for many reasons, undesirable user, or site, or the floor price is too high for the current bidders.
The number of impressions is the number of ads that are returned after it’s requested. The number of impressions served will be affected by the floor pricing. There is always a difference between the amount requested and actual impressions. With a floor price that difference is highlighted more, with there being even less impressions in the floor price traffic versus the control.
The most important number to focus on is the final one – revenue. The second most important one is the CPM because that gives you insight on the effectiveness of the floor price.
For example, if after a set period the traffic subject to the floor price and the control group are compared, a publisher would like to see a difference in the CPM of each.
If there’s no difference, that would indicate that a floor price is unnecessary and may even be hurting CPMs.
If the difference is significant, then you know the floor price is working. If the difference is small, then you know the floor price is bumping CPMs but not significantly.
Digging Deeper in Floor Price Evaluations
An interesting thing to note in the report is the amount of ad requests versus the number of ads served and the subsequent revenue. Often publishers will look at their revenue with a floor price and don’t see a significant difference between it and the control traffic. The CPM with the floor may be higher, but that doesn’t necessarily translate to higher revenue. Before publishers despair, and decry floor prices, there is more going on those publishers may not initially notice.
While technically the CPM is higher, the understanding of its value is found in the requested and served ratio. Most often there will be significantly less ads served with a floor price and the resulting revenue is equal to, or slightly higher than the control. The publisher may feel like the floor price isn’t doing much work here. On the contrary, it’s provided a better UX for the users as there are less ads, but the same revenue for the Publisher. Always work smarter, not harder.
How Often Are Floor Prices Updated
Dynamic floor prices are updated algorithmically once a day. Engineers receive reports on the changes the algorithm made. They are generally not significant, just minor optimization tweaks. The engineer can override the algorithm’s changes if they see fit.
The floor prices are updated on two variables:
- The floor price itself
- The percentage of traffic directed through the floor price. This number will fluctuate but always be at least 10%, the other amount serves as a control to analyze the floor’s effectiveness.
Where Floor Prices Get (more) Complicated
While it may seem like we discussed the floor price complication, there are many more factors that can affect the floor price and site monetization.
The site’s CPM is heavily influenced by the amount of demand per day. The more requests the higher CPM. However, it’s difficult to compare one day with the next, because each day is different, and the requests are varied. The algorithm is predicting the future based on past information. If a site has a post go viral, or a particularly bad day, or they’re on a steady path of growth or decline, the algorithm is relying on outdated or out of median information. Next Millennium solves this issue by aggregating prior behavior and traffic to detect patterns and take finding into consideration for floor prices.
Additionally, sites are often optimizing for other factors, aside from floor price. Depending on the priority, those optimizations may be counter to floor prices, or make floor prices low on the priority list rendering it toothless.
Next Millennium has a sophisticated algorithm to predict and regulate floor prices for maximum revenue for the publisher. They understand the ins and outs of the subject and are always tweaking and optimizing their product to benefit publishers.
Floor prices are an effective tool for publishers to utilize to ensure the stability of their CPMs. There are many considerations and factors that go into creating an effective floor price. A dynamic floor price that constantly updates is an easy way to mitigate floor price effectiveness concerns.