In launching the new auction format, we deliberately decided to preserve the principles of bid management strategies that are familiar to our advertisers. However, one of these strategies, the “Cheapest position in ad block”, is making less and less sense in the current environment. Let's have a closer look at what has changed.
How and why the “Cheapest position in ad block” strategy was created
The idea of taking the third position in premium placement became popular even before the appearance of the corresponding strategy in Yandex.Direct. There was even talk that “rational” advertisers were the ones who’d appear in third position, while those in first were the ones who have a lot of money and drive.
Initially, advertisers were manually adjusting their bids in an attempt to remain in third position. Later, this was done for them by automated systems. Finally, in 2010, Yandex announced a new strategy that was integrated in Yandex.Direct and had an amazing real-time feature — the algorithm automatically set the minimum bid required to enter the block by considering the current set of competitors and the user who made a specific request in a particular region. The strategy was triggered right at the time of selecting the ads.
Why the “Cheapest position in ad block” strategy was so successful
Before September 1, 2015, ads were selected for the main blocks based on the product of CTR multiplied by bid amount (CPM), and positioned within the block according to the bids in descending order.
With the “Cheapest position in ad block” strategy enabled, the minimum bid required for each ad was often determined by the CPM of the fourth bidder, while the three bidders with the greatest CPM values were selected in the block. As a result, the algorithm used for selecting the minimum required bid to achieve the lowest position in the block reduced the bid to such an extent that the ad's CPM was just slightly above the CPM of the fourth bidder. With a lower bid, it would simply not be included in the block.
If three ads with the strategy were included in the block, the algorithm calculated the bids as follows:
As can be seen, ads with a high CTR were able to get into the block with a relatively low bid. Moreover, despite being in the last positions in the block, they could get a significant amount of traffic. Their CTR remained naturally high, while their ad often attracted even more attention, and the placement turned out to be consistently profitable.
Curiously, the lower the CTR, the higher the required bid and the position of the displayed ad was. Previously, this effect allowed a little trick – it was possible to make the text of the ad less clickable and, as a result, to display it in first position. The increased number of clicks resulting from a high CTR of the first position usually compensated for a slight drop in CTR due to less clickable text. Following the transition from the third to the first position, the number of clicks increases by 33%. In other words, by reducing the CTR by 5%, it was possible to get 33% - 5% = 27% more clicks*.
New auction system: consistency of selection with ranking
On September 1, 2015, the rules were changed for selecting and ranking ads in the search results. Now, both the selection and ranking by positions in premium placement and guaranteed impressions are provided in accordance with CPM.
This method, together with the features of the new VCG auction, has significantly changed the characteristics of the “Cheapest position in ad block” strategy. Let's have a look at how this strategy works now.
As before, the minimum bids for the ads with the strategy enabled are calculated in relation to the CPM of the fourth advertiser who was not included in the block:
Bid = CPM4 / CTR
However, not only the selection but also the ranking is figured out in accordance with the CPM. For all those who use the “Cheapest position in ad block” strategy, its value is equal to CPM4:
CPM = bid×CTR = CPM4/CTR×CTR = CPM4
As a result, the value used to rank the positions becomes the same for these advertisers. So, in what order will they appear? There are some small issues that arise from rounding to the nearest bid increment. However, overall, their order is largely random.
When there are three ads with “cheapest position” in the same block
The average ratio of position CTR in the premium placement is 100/85/75.
When the three ads with the “Cheapest position in ad block” strategy enabled are rotated within the block in random order, each of them gets on average (100% +85% +75%) / 3 = 86.7% of the clicks that it could get in the first position.
Selection in the block: CPM А, CPM B and CPM C must be greater than CPM4.
Ranking: If “Cheapest position in ad block” was enabled for all three ads in the block, they will be assigned the minimum required CPM values – that is, values equal to CPM4. With such figures, the ranking is made in random order.
Bid: This depends on its CTR for each one, but is determined by CPM4.
If one of the bidders decides to disable the strategy, they will not get just 86.7% of clicks, but the entire 100%. This is related to the consistency of selection and ranking. An ad with a regular strategy will be ranked higher than the ad with the “Cheapest position in ad block” strategy.
In this case, the cost per click paid by the bidder who disabled the strategy will remain the same, i.e. it will be determined by CPM4. The two ads that remain on lower positions are, so to speak, merged into a single group with the fourth advertiser, and they all prop up the first advertiser with the same CPM value equal to CPM4.
When there are two ads with “cheapest position” in the same block
When the first advertiser is in first position, the other two with the “Cheapest position in ad block” strategy enabled will share the second and third positions rotating in random order. Each of these two advertisers gets (85% + 75%)/2 = 80% of the clicks obtained from the first position. In other words, they lose 6.7% of clicks each, because the first advertiser changed their strategy and occupied the most clickable position above them in the block.
For the first-placed advertisers, moving to the “highest available position” brings many benefits. Their CPC does not change, but they get additional clicks.
Ranking: if B and C have enabled the “Cheapest position in ad block” strategy, then A, who has disabled this strategy, will be in the first position, regardless of its CPM.
Bid: This depends on its CTR for each one, but is determined by CPM4. For A, the cost per click did not change.
When there is one ad with “cheapest position” in the block
If one of the remaining two advertisers with the “Cheapest position in ad block” strategy enabled disables it, it will be placed in the first or second position, depending on the value of its CPM compared to the first bidder. If it goes, for example, into second position, then it will start to get 85% of first position clicks. In other words, the number of its clicks will increase from 80% to 85%. At the same time, its CPC will not change.
By switching to another strategy, the second bidder will slightly increase the CPC of the first bidder, but still, the first bidder will find it profitable to remain in first position. Given the specific features of the VCG auction, they will continue to get 85% of clicks at the price calculated based on CPM4 – and only 15% of clicks at the price calculated based on CPM2.
Ranking: B enabled the “Cheapest position in ad block” strategy, and its CPM does not affect the ranking of other bidders.
The position of C, who disabled the “Cheapest position in ad block” strategy, depends on the CPM. If its CPM is higher than the one for А, it will not be ranked in the first position. If it is lower, then C will be ranked in the second position, as shown in the illustration.
Cost per click: For А, it increased only for 15% of clicks but for the rest it is determined by CPM4. For C, the cost per click did not change.
As a result, we have just one advertiser with the “Cheapest position in ad block” strategy enabled. Does this mean they will also profit from disabling the strategy? Surprisingly, yes.
If their CPM is lower than the CPM of the other two bidders then, by disabling the strategy, they will remain in third position and continue to pay the same price per click as before while getting the same amount of clicks. However, in this case, they will “detach” from the supporting CPM4 and start to compete with the two top bidders based on the true value of their CPM = CPM2 = Bid2 × CTR2.
If their CPM is better than the similar figure of one or two other bidders, they will also find it profitable to disable the strategy, but for a different reason — to maximize their profits. When bound to the third position, they receive only 75% of clicks, and, as a result, forgoing the opportunity to get more, even if the additional traffic can be purchased at a profitable price.
“Cheapest position in ad block” vs. VCG
The logic of the advertisers’ favorite “Cheapest position in ad block” strategy is similar to the logic of the VCG auction, provided that the positions have an equal CTR.
In the old “second price” auction, the strategy greatly simplified the task of advertisers to submit optimal bids and allowed them to get additional traffic from a higher ad CTR, rather than from its position. Now, with the consistency of selection with ranking, the strategy always restricts not only the cost but also the amount of traffic that the ad will receive.
Identical numbers in the interface
Of course, for some bidders, the “Cheapest position in ad block” strategy is still relevant, but more and more advertisers are gradually moving to the “Highest available position” strategy. During this transition, advertisers may see some strange things in the interface related to the situations discussed above. One such example is when the bids for the first three positions are the same, and the click prices match the bids.
This is because several advertisers that use the “Cheapest position in ad block” strategy can be placed for a given search query. The ads with this strategy are combined into a single group, since they have the lowest positions in the block. In this case, a new advertiser with the “Highest available position” strategy can get into the block directly to the most attractive first place. As discussed above, the cost per click will be minimal. In other words, it will be determined by the CPM of the fourth bidder who did not get into the block.
If a new advertiser also uses the “Cheapest position in ad block” strategy, it will push the weakest bidder out of the block and they will join the general rotation. These ads will randomly occupy certain premium placement positions until they are displaced from bidding by advertisers who do not use this strategy and are ready to buy the traffic on prominent positions at a low price.
Notes:
*The exact increase in the number of clicks as a result of transition from third to first position for an advertiser who tarnished its CTR is calculated in our example as follows: 133 × 0.95 − 100 = +26.7%. For readability, we slightly rounded the results in this article.
**This article discusses the examples for the premium placement block. Everything will be the same for the guaranteed placement block. Taking into account the position CTR ratio specific for this block, it will be: 100/75/65/60.
***For the sake of simplicity, in the formulas and descriptions, the bid increments and quality coefficient have been considered negligible.