Facebook is the largest social ads platform with a user base that has been growing steadily over the last decade. As of June 2016, Facebook had 1.7 billion users and over a billion daily logins. These numbers are clearly dazzling for advertisers who are on the lookout for new platforms to reach new users. However, there is huge competition between advertisers: thousands of companies target the same people on Facebook and millions of impressions are auctioned every day. In such a competitive environment, understanding the mechanism of Facebook ad auction plays an important role for running successful Facebook campaigns.

Vickrey-Clarke-Groves Auction

The Vickery-Clark-Groves (VCG) is a sealed auction of multiple items where bidders cannot see others’ bids. Although the winner of a VCG auction is the highest paying bidder, he pays only as much as the bidder(s) he displaced by entering the auction. Therefore the right strategy in a VCG auction mechanism is to bid your true value since VCG aims for a socially optimal auction.

You might think that VCG auction is a modern invention created specifically for our digital age, since it so perfectly meets the needs of Facebook advertisers. Yet, its creation dates back to the 60s and 70s. It’s even as old as Atari!

Let’s have a look at how it works with an example:

Facebook Ad Delivery - Auction Mechanism
Imagine you are one of 4 advertisers bidding for two impressions and one bidder can win at most one impression. You bid $11, while the others bid $7, $5 and $3. The winners of the auction will be the two highest bidders: you and the $7 bidder. While the winning bids are $11 and $7, you and the other winner will only pay $5 each. Sounds too good to be true? Let’s look at how this is calculated:

winner payment formula
Based on the formula above:

Payout for advertiser with $11 bid (You): 

  • If we removed You from the auction, $7 and $5 bids would win. Therefore, sum of other winning bids without the winner in auction is
    $7 + $5 + $0 = $12
  • Sum of the other winning bid with the winner in auction is
    $7 + $0 + $0 = $7
    as this bidder would be the only one in addition to you.
  • So, the winning bid (what You pay) is $12 – $7 = $5

Payout for advertiser with $7 bid: 

  • If we removed this bidder, $11 and $5 bids would win the auction. Therefore, sum of other winning bids without the winner in auction is
    $11 + $5 + $0 = $16
  • Sum of the other winning bid with the winner in auction is
    $11 + $0 + $0 = $11
    as you would be the only one winning in addition to this bidder.
  • So, the advertiser with $7 bid pays ($16 – $11) = $5

This example reveals two important features of VCG auction mechanism:

  1. Bidders pay less than the amount they actually bid.
  2. The amount the winners pay is determined by the bids they displaced by entering and winning the auction.

These two features encourage bidders to bid their true value instead of gaming the system.

How Facebook adopted VCG Auction

There are several bidding options on Facebook: you can bid for impressions, link clicks and actions. And of course, it is natural that all deserve different bid amounts. However, in order for Facebook to manage ad auctions, every bid should be converted to a comparable unit. Otherwise, Facebook would be comparing apples to oranges while determining the winners of the auctions. Therefore, Facebook converts each bid to an effective bid per impression using several factors, including the bid amount, probability of action that you bid for, and quality score.

Bid amount
The bid amount is simply the maximum amount you would be willing to pay for the action you bid for.

Let’s have a closer look at the probability of action and quality score.

Probability of action:
Imagine you bid for link clicks to your website. After your campaign is approved, Facebook starts with an initial estimate of a click-through rate and uses this rate to convert your bid for a link click to an effective bid per impression. As you start winning auctions and get impressions, Facebook updates its click-through rate estimate and this is reflected in the effective bid. Therefore, it is essential that you bid for actions which occur often enough to help Facebook learn your specific probability of action quickly so that your campaign optimization starts sooner.
We advise you to choose a bidding action which occurs at least 25 times per day to help Facebook learn and deliver the ads to people who are more likely to convert. If there aren’t enough conversions, you might consider moving up in the conversion funnel.

Quality score:
Facebook aims to maximize the value/experience received by both the advertisers and the users. Therefore, it calculates quality score for your ads based on the feedback your ads get from users. Positive actions, such as conversions and likes, increase your quality score, while users opting to hide your ads will reduce your quality score. Therefore, the effective bid is also impacted by the quality score.

Conclusion: Give your true bid!

With the VCG auction, Facebook aims to find a balance between creating value for advertisers and providing valuable experience for its users. Therefore, it is important that you give your true maximum bid and create high quality targeting groups in order to increase ad quality and relevance and ensure efficient ad delivery.

If you want to find out how this can really benefit your company, talk to us today!

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