What Is Waterfall Bidding?

How Does Waterfall Bidding Work?

What does waterfall mean in advertising? Waterfall mediation is one of the strategies that allows app publishers to sell their ad inventory to a competing pool of demand partners – also known as demand sources (DSPs) or ad networks. Publishers use these multiple partners to fill their ad space and generate revenue.

Whenever an ad impression becomes available, a publisher’s waterfall mediation solution manually calls these demand sources one by one, in a specific fixed order. This order is typically ranked on historical data – from highest to lowest eCPMs. If the first-priority partner (the buyer) rejects the bid, the request will go to the next partner in line. 

Reasons for rejecting the bid include that the network doesn’t have an ad that fulfills the requirements provided by the publisher in the request – such as floor price and GEO.

This process continues trickling down from ad source to ad source until one fills the impression. This is the premise of waterfall bidding and is how it got its name.

What Is Hybrid Mediation?

There has been industry pressure to move away from waterfall bidding due to its shortcomings in maximizing revenue from ad requests. For this reason, some publishers run an auction in parallel with waterfall bidding. This is known as hybrid mediation and is when waterfall mediation and in-app bidding are simultaneously deployed. 

This hybrid model is intended to help publishers boost their revenue by integrating in-app bidding into various positions in waterfall mediation. Instead of only receiving bids via waterfall bidding, publishers can make impressions available to as many buyers as possible. This means that there is a higher chance of filling ad space and allows publishers to increase revenue generated from their ad inventory. 

Real-Time Bidding vs Waterfall Bidding: What’s the Difference?

Unlike waterfall bidding, which is based on fixed costs and historical data, the costs in in-app bidding are based on real-time data. This data reveals how much demand sources are bidding on ads. 

Since this bidding occurs outside of the waterfall, an unbiased auction is able to take place. This is where bids are placed in real time and the highest bid wins. There is no fixed sequence that prevents ads further down in the chain from being called and the publisher subsequently losing out on revenue from bidding partners willing to pay more for inventory.

In this form of mediation, publishers tend to prioritize the demand partners and ad networks they work with. This means that it’s not always the highest bid that wins but the ad network that has manually been prioritized by the waterfall solution and has the highest historical eCPMs. 

Why Are More Publishers Turning Away from Waterfall Mediation?

Waterfall mediation constitutes many pitfalls when it comes to publisher revenue and also ad networks wanting to pay for inventory. 

• Waterfall bidding relies on historical performance data and therefore limits revenue yield. This is because app publishers often end up underselling their inventory. For example, a lower-ranking network might be willing to bid higher to get the ad inventory but is unable to do so because a top-ranking network has won the bid. 
• Competition is limited. With this mediation model, publishers can only call one ad buyer at a time, making the bidding process less transparent and open. 
• Latency is compromised. Setting up waterfall bidding is a tedious manual task. It increases the time it takes for ad inventory to reach a demand source willing to pay for inventory. In the end, publishers can miss out on efficiency and revenue. Especially, in some cases where inventory may remain unsold completely. 

Conclusion

Waterfall bidding has been used by app publishers as an ad monetization solution in the adtech space for several years. However, this form of mediation is now widely considered as a nontransparent mediation solution. This is because it’s seen as limiting competition between bids and preventing app publishers from maximizing their revenue and earning premium. 

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