Walmart’s Advanced Second Price Auction
What Walmart Second Price Auctions Mean and How to Win
Walmart Keyword Bidding Second Price Auction
According to ChannelAdvisor, Walmart, In order to stay competitive within the e-commerce retail industry, has implemented second-price auctions for payment-per-click product ads. One critical advantage of transitioning to the second-price auctions is preventing the top bidder to pay the highest price (bid price). Unlike the textbook explanation of second-price auctions in chapter 9, Walmart tweaks it by making the top bidder pay +$0.01 more than the second-highest bidder. In addition, Walmart included ad relevance into one of its determining factors for the second-price auctions. Calling it the advanced second-price auction, Walmart determines which competing ads are most relevant to the consumer’s search by utilizing an algorithm, scoring relevancy based on: customer’s intent, ad’s contextual relevance, quality of item page content, the product’s historical performance at Walmart. By determining these factors, the award (the ad) is given according to the best match in terms of both price and relevance.
Here is an example of how this can be done (referencing from the website: perpetua.io)
Advertiser A:
- Relevancy Score: 98%
- Bid: $4.50
Advertiser B:
- Relevancy Score 60%
- Bid: $5.00
Advertiser C:
- Relevancy Score: 80%
- Bid: $3.00
Even though, Advertiser B has the highest bid price of $5.00, it has the lowest relevancy score compared to that of Advertiser A and Advertiser C. Since Advertiser A has the next highest bid price of $4.00 and the highest relevancy score compared to that of other Advertisers, Advertiser A will be the winner of this auction. Taking into consideration that this is still a second price auction, the winner of the auction will pay the bid price of or between the bid price of the next bidder with the lower price. In this case, Advertiser A pays a price between $3.00 (Advertiser C’s bid price) and $4.50 (Advertiser A’s bid price).
In order to be successful with Walmart’s new implemented auction pricing model, one must: 1. Not underbid (same as what the dominant strategy of the original second price auction suggests), 2. Enhance content for more relevancy, and 3. Assigning bids according to the current organic rank of items. In the original strategy for bidders to win the auction, it would be just to bid the bidder’s truthful price. However, the additional component, relevancy, has made the bidding game more sophisticated and two dimensional as bidders have to take into account both the price and relevancy to effectively win the bid. If a bidder invests all its money on an item with the lowest relevancy score, then it is most likely the bidder will lose the auction as well as lose money because the advertisement won’t be as effective due to its low relevancy score. On the other hand, if the bidder invests strategically by investing less on items with low relevancy score and investing more on items with high relevancy score, then the bidder will have a better outcome.
Overall, through this new change of second price auction, it seems like a beneficial transition for advertisers as they will still be able to reduce the risk of overpaying for an advertisement and be more effective with the amount invested in these advertisements.