What is an Ad Exchange and how does it work?

What is an ad exchange?

If you buy or sell advertising, you’ve no-doubt heard of ad exchanges.

An ad exchange is a core feature of programmatic advertising—the most widely adopted way of buying and selling digital ad space today. (That’s why it’s also known as a “programmatic ad exchange.”)

It works like an auction, where advertisers compete by placing bids to show their ads on different websites or apps. When a user visits one of those sites or apps, the ad exchange matches the right ad with that user, based on data sets like interests or behavior.

This all happens in real time—within a matter of milliseconds—to make sure the user gets to see the ad. Pretty nifty.

How do ad exchanges work?

Ad exchanges use demand-side platforms (DSPs) to help advertisers buy ad space.

Spotify Ad Exchange, for instance, uses industry-leading DSPs and identity solutions (DMPs), such as Magnite, The Trade Desk, LiveRamp, and DV360, to help advertisers get their messages in front of the right people.

Here’s how:

When ad space becomes available on Spotify, the Spotify Ad Exchange holds an auction.

The DSPs, which represent the advertisers, automatically place bids on the ad space, and they use data about users to decide who sees the auction-winning ads.

Those ads are then served on Spotify to the people deemed most likely to convert—whatever the desired action.

So it’s a really neat way of driving conversions through effective targeting.

What are the benefits of an ad exchange?

The benefits of ad exchanges for publishers are greater revenue, access to more advertisers, and a much easier way of selling ad inventory, with real-time pricing.

For advertisers, the main benefit is the simplicity with which they can tap into—and take advantage of—detailed platform data. The Spotify Ad Exchange, for example, enables advertisers to reach Spotify’s highly engaged audience through its behavioral, interest-based, and demographic targeting capabilities.

By automating the ad-buying process, ad exchanges like the Spotify Ad Exchange empower advertisers to spend less time on ad management per platform, and more time effectively running campaigns across multiple channels.

Ad exchange vs ad network

Ad networks and ad exchanges are both part of the programmatic advertising world—and you might hear the terms used interchangeably—but they’re not the same thing.

The difference between ad exchanges and ad networks is simple:

Ad exchange

A real-time auction that buys and sells ad space directly, using automated bidding, giving maximum control and transparency to advertisers and publishers.

Ad network

A go-between that aggregates ad inventory from different publishers and sells it to advertisers, who typically buy it pre-packaged (meaning less transparency).

Ad networks simplify ad buying by offering readymade inventory and targeting options, like keywords, interests, and demographics. So they’re another really easy way of getting targeted messages out there.

But the real-time bidding and automation of ad exchanges like the Spotify Ad Exchange give advertisers the security of knowing where their money is being spent—and how much of it.

Open ad exchange vs private marketplace (PMP)

A Private Marketplace (PMP) is a programmatic type of buying method that’s open to advertisers by invitation-only. Spotify has its own PMP offering.

Typically, the benefit of using a PMP is that advertisers get access to exclusive and premium placements, as well as the most advanced audience targeting. There’s also lower competition due to the exclusivity aspect.

But advertiser size and budget are often a factor as to whether you’ll get the invite or not.

With an open ad exchange, like the Spotify Ad Exchange, anyone can bid for ad space—no invitations, no pre-agreed partnerships. So disruptor brands can bid within the same arena as their biggest rivals and enjoy exposure within the same, sought-after ad space.

For established brands, competing in an open exchange as well as in a PMP gives them a much richer ad strategy.

They can leverage PMPs for their most exclusive placements—ensuring priority access to select inventory and the chance to build direct relationships with publishers—and then drive their performance-focused campaigns through the open exchange for the broadest reach and flexibility to adjust bids in real time.

It all makes for a much more elastic advertising arena, where advertisers can trial different strategic combinations and zero ever closer in on that all-important ROI.