What is an ad exchange? Learn how they work
What is an ad exchange?
An ad exchange is technology used in programmatic advertising that facilitates the buying and selling of digital inventory using real-time bidding (RTB).
Think of an ad exchange as a digital marketplace where advertisers, agencies, publishers, supply-side platforms (SSPs), and demand-side platforms (DSPs) can bid on advertising inventory from various publishers. Advertisers determine the price by participating in the bidding process.
Open ad exchange
An open ad exchange is a marketplace that allows all sellers, buyers, ad networks, and advertisers to access the buying and selling of digital inventory.
Private ad exchange or private marketplace (PMP)
A private ad exchange or private marketplace (PMP), on the other hand, is a more controlled marketplace where only select publishers and buyers compete for inventory.
How do ad exchanges work?
An ad exchange is a key component to programmatic advertising, or the use of technology to buy and sell digital ads. Programmatic advertising uses an automated process, within advertiser-defined parameters, to purchase digital ad inventory across the web, mobile, apps, video, and social media. Programmatic advertising uses workflow automation and machine learning algorithms to deliver the most effective ads to campaign audiences based on a variety of signals.
Real-time bidding (RTB) is a form of programmatic advertising that allows for the buying and selling of digital ads in real time. When users go to a website or mobile app, a real-time auction is conducted where advertisers bid and compete for an ad space. If the advertiser has the highest bid in the auction, their ad is displayed on a publisher’s website or mobile app.
RTB is facilitated through a process that involves supply-side platforms (SSPs), demand-side platforms (DSPs), and ad exchanges. An SSP is programmatic software for publishers to facilitate sales of their advertising impressions, and a DSP is software for advertisers that provides automated, centralized media buying from multiple sources. An ad exchange allows SSPs and DSPs to communicate with each other so publishers and advertisers can buy and sell inventory through RTB.
Certain types of programmatic ads are measured by cost per mille (CPM), which means cost per thousand impressions. CPM is a pricing model where you pay a certain amount for 1,000 impressions, or the number of times your ad appears.
This process begins with a publisher making their ad inventory available on the ad exchange through an SSP, where they specify all the necessary details about the inventory based on audiences, geographic location, etc. Then an advertiser communicates with the ad exchange through a DSP to bid for the inventory. The ad exchange will determine the most relevant bidder for that inventory. The entire RTB exchange happens in a matter of milliseconds.
What is the difference between ad exchanges and ad networks?
Both ad exchanges and ad networks are programmatic software that are used during the buying and selling of digital ads, but each serves a slightly different purpose. While an ad exchange functions as a marketplace for publishers and advertisers to buy and sell digital inventory, an ad network buys inventory from publishers and then sells it to advertisers as more of an intermediary. (This ad network model does not typically include RTB capabilities)
Benefits of an ad exchange
In 2021, programmatic advertising made up 89% of all digital advertising spend.1 This type of advertising is on the rise because it is fast, efficient, and cost-effective. Through RTB, advertisers are able to have more control over their buying, which cuts down on wasted ad impressions by serving ads to relevant audiences and minimizing ad fraud risk.
Meanwhile, publishers are able to use this ad tech to find the right demand sources to work with, based on factors like latency, unique demand, bid rates, and ad space availability. This allows for the optimization of their inventory to specify which advertisers can buy at what pricing. An ad exchange can give publishers and advertisers control over inventory by defining the location, format, content, and budget of placements. Additionally, ad exchanges can give buyers the ability to apply brand safety mechanisms and reach an audience across multiple publishers and formats. Buyers can also measure performance to better understand which publishers or content categories are leading to preferred outcomes.
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1 eMarketer, 2021