Ad Exchange: What Is It and How Does It Work?

Ad Exchange: What Is It and How Does It Work?

7 Min Read

The tech world, specifically the ad tech world, can feel like an excess of new words and tools that seem to pop up overnight. As you begin to explore the various terms of programmatic advertising, an ad exchange is something you’ll see mentioned often as an important part of the programmatic ad buying and selling process.

Keep reading to learn more about what is an ad exchange, how they work, who uses them, and the various types of exchanges.

What Is an Ad Exchange?

An ad exchange is a digital marketplace that facilitates the buying and selling of advertising space in real-time through automated auctions. In other words, it acts as a marketplace that sits in between publishers looking to sell their inventory and advertisers looking to buy it.

Ad Exchange vs. Ad Network

An ad network aggregates ad inventory from multiple publishers and sells it to advertisers, often categorizing the inventory into specific segments based on content type, audience demographics, or other criteria. Ad networks traditionally played the role of a middleman by purchasing unsold inventory from publishers in bulk and packaging it for sale to advertisers, often adding a markup in the process.

While ad networks provide reach and simplify the ad buying process, they typically offer less transparency and direct control over placements compared to ad exchanges.

How Does an Ad Exchange Work?

To recap, an ad exchange is a digital marketplace that streamlines the buying and selling of advertising space, primarily through real-time bidding (RTB) mechanisms. Here’s how it typically works:

  • Integration with SSPs: Publishers use supply-side platforms (SSPs) to connect their available ad inventory to the ad exchange. The SSP represents the supply side, managing the publishers’ inventory and setting floor prices for ad spaces.
  • Access by DSPs: Advertisers access the ad inventory available on the ad exchange through demand-side platforms (DSPs). The DSP represents the demand side, allowing advertisers to set their targeting criteria, budget, and bids for ad impressions.
  • User Visits a Publisher’s Site: When a user visits a website connected to an SSP, the SSP sends a bid request to the ad exchange, including information about the available ad space and details about the user, while ensuring privacy compliance.
  • Bid Request Broadcasted to DSPs via RTB: The ad exchange broadcasts this bid request to multiple DSPs in real-time. The DSPs evaluate the request based on the advertisers’ targeting criteria and budget.
  • Advertisers Place Bids: Through the DSPs, advertisers place bids on the ad impression in real-time, indicating how much they are willing to pay to display their ad to the user based on the provided user information and ad space.
  • Selection of the Highest Bidder: The ad exchange runs the real-time bidding (RTB) auction, automatically selecting the highest bid that meets the publisher’s floor price set by the SSP.
  • Ad Delivery to the User: Once the winning bid is determined, the ad exchange instructs the SSP to serve the winning advertiser’s ad to the user’s device, displaying it in the specified ad space on the publisher’s site.
  • Performance Tracking and Settlement: The ad exchange tracks the performance of the ad (clicks, impressions) and facilitates the financial transaction. The advertiser pays the bid amount through the DSP, the ad exchange deducts its fee, and the remaining amount is passed on to the publisher through the SSP.

This process enables efficient, automated, and transparent transactions between buyers and sellers in the digital advertising ecosystem, optimizing ad placements and pricing through real-time market dynamics.

Ad Exchange Benefits

For marketers and advertisers, leveraging ad exchanges brings several tangible benefits that enhance campaign performance, increase ad reach, and provide insightful data analytics.

  • Expanded Reach: Ad exchanges provide marketers access to a wide range of publishers, increasing the potential audience and ensuring a more extensive reach of their advertisements.
  • Real-Time Bidding: Ad exchanges operate on real-time bidding (RTB) systems, allowing advertisers to bid on impressions as they become available, ensuring cost-effectiveness and immediate ad placement.
  • Precise Targeting: Using ad exchanges, marketers can utilize detailed targeting capabilities like demographic, behavioral, and geographical data, making their campaigns more relevant to the user.
  • Transparency: Ad exchanges provide transparency about where the ads are being placed, giving marketers control over their brand safety and improving the effectiveness of their campaigns.
  • Performance Metrics: With ad exchanges, advertisers get real-time performance metrics, helping them to understand their audience better, optimize their campaigns, and measure their return on investment.

Types of Ad Exchanges

There are various types of ad exchanges including:

Open Ad Exchange

An open ad exchange is perhaps what most refer to when discussing an ad exchange. An open ad exchange is exactly what it sounds like–an ad exchange that is open to anyone to access. Any advertiser, agency, or ad network has access to the inventory on the open exchange.

Private Ad Exchange

A private ad exchange is also just what it sounds like–an exchange that can only be accessed by specific advertisers. A publisher may want to limit who can access their inventory (and therefore, what advertisers show up within their content) so rather than post their inventory to an open ad exchange for anyone to access, they use a private ad exchange. A private ad exchange also prevents an ad network from reselling a publisher’s inventory.

Preferred Deal

A preferred deal is negotiated between a publisher and an advertiser. A fixed price, usually at a premium, is agreed upon so that an advertiser can get a first look at the inventory a publisher has available. If the advertiser does not want the inventory, it then moves to a real-time auction. This is also often called programmatic non-guaranteed because the inventory isn’t reserved for the buyer and they don’t need to buy the inventory once they see it.

Who Uses Ad Exchanges?

So who exactly buys from advertising exchanges?

An ad exchange is meant to make advertising available to anyone who is looking to advertise. Most commonly, advertisers will buy directly from an ad exchange or an agency will buy from the exchange on behalf of their clients. While less common, an ad network may also buy directly from an ad exchange.

Ad Exchange Examples

Now that you know what an ad exchange is conceptually, what about some real-life examples? 

Some popular ad exchanges are:

  • Google Ad Exchange
  • OpenX
  • AppNexus
  • Rubicon Project
  • Verizon Media

Is Google Ads an Ad Exchange?

This is a great question because the naming here doesn’t make this one easy. There are two different Google entities you may be hearing about: Google Ads and Google Ad Exchange.

Google Ads is a paid search platform–not an ad exchange.

This service sells paid ads at the top of search results or within the Google Maps function. Advertisers can buy keywords relevant to their business and these ads appear when a user searches for those terms.

Google Ad Exchange, which is often referred to as Google AdX, is an ad exchange and one of the most popular.

How Do Ad Exchanges Make Money?

Programmatic ad exchanges make their money in a few ways.

First, they often require a setup fee to be paid at the outset of using the exchange.

Second, and perhaps the most common way an ad exchange makes money, is off a commission. A publisher pays a percentage of the money that they make from an advertiser back to the ad exchange since the exchange was what helped make the connection and ultimately the sale. The cost doesn’t always fall to the publisher. Advertisers may be the ones responsible for the commission, depending on the ad exchange and the negotiated deal. 

How Does Performance TV Stack Up?

How does Performance TV compare to an ad exchange? Well, Performance TV, a form of OTT advertising, plays a different role in the ad ecosystem and actually works with ad exchanges along the programmatic process.

That said, unlike an ad exchange, Connected TV platforms like MNTN offer both quality impressions and transparent reporting. 

  • Quality: Performance TV offers Living Room Quality inventory. This means that your CTV ads will only show up within premium networks, such as ESPN or Discovery+, and not any longtail channels, like The Belly Dancing channel. All impressions are also non-skippable. Ad exchanges are often open markets so the quality of the impression is not guaranteed.
  • Transparency: Not only does Premium TV offer guaranteed quality impressions, but you’ll know exactly where those impressions ran using our reporting suite. With programmatic ad buys, they may utilize multiple ad exchanges which means multiple reports and it’s not always clear exactly where your ad impressions are running. 

Ad Exchanges: Final Thoughts

An ad exchange is a connection between the publisher looking to sell impressions and an advertiser looking to buy impressions. While advertising exchanges were originally created to make it easier and more mutually beneficial to exchange ad impressions, there are safer and more transparent options for CTV/OTT advertisers to explore.