Instacart Ads

Advertising on Instacart 101: How 2nd Price Auctions Work, Why They’re Great

Advertising on Instacart 101: How 2nd Price Auctions Work, Why They're Great

Advertising on Instacart 101: How 2nd Price Auctions Work, Why They're Great

Jul 29, 2021

In the Advertising on Instacart 101 series, we introduce readers to Instacart Ads, look at some key concepts, and talk about the value they can provide brands of all sizes — from emerging challenger brands to the very largest category leaders.

In this article, we look at the concept of 2nd-price auctions, how they work compared to other types of auctions, and the benefits of this model for advertisers.

Wait, there are auctions on Instacart?

There are actually millions of auctions going on behind the scenes on the Instacart platform everyday. They happen automatically every time we show a Featured Product ad to a consumer anywhere on the Instacart marketplace. The auction helps to determine which product to advertise. Brands bid on the amount they would pay for a consumer to click on their Featured Product. The system factors in this bid and how relevant each product is to the consumer to arrange products on the page in different Featured Product placements.

We use a specific method for our auctions, known as 2nd-price auctions.

Aren’t all auctions the same?

While they’re similar in that you’re bidding to win something, not all auctions are the same. Instacart Ads uses 2nd-price auctions because they provide better value to our brand partners advertising with us and provide a level of fairness that our brand partners value.

To understand why this is and how 2nd-price auctions work, let’s start with the auction model you’re probably most familiar with — highest bidder wins. If you’ve ever been to a live auction or seen one portrayed on TV or film, you’ve probably seen this kind of auction in action. People bid on the item with each bid representing the price they’d be willing to pay. Sometimes there are multiple rounds as people bid each other up but eventually the auction is called and the highest bidder pays the amount they bid for the item. But the winner pays this bid price even if they could have won with a much lower amount.

Say we’re bidding on an antique lamp. I bid $30, you bid $40, and then, worried about a bidding war starting, I bid $75. No more bids come in and I win, forking over $75 for the lamp. I leave the auction with the lamp but without knowing how much it is really worth — just what I paid for it. Maybe $45 was your maximum bid, and I could’ve won the lamp for $46. I didn’t want to risk that happening, so I bid high, but ended up paying more than I had to for the lamp.

This doesn’t happen with 2nd-price auctions.

With a 2nd-price auction, the bidders set their maximum bids and only pay what they need to in order to win, based on the other bids. So in that same example, bidding on the lamp, if I set my maximum bid at $75 and you set yours at $45, I’ll still win, but I end up paying a little over $45, just enough to win, rather than the full $75.

Auctions at Instacart Ads

With Instacart Ads you enter a maximum cost-per-click (CPC) bid which represents the amount you’re willing to pay for a click. If a customer clicks on your ad, the amount you end up paying per click is essentially the ‘market rate’ for the click — and not necessarily your bid amount.

What you end up paying, and where your ad is placed on our shelf, takes into account factors like how relevant your product is to the consumer — ads for ice cream are more relevant than ads for frozen yogurt to a consumer who searched for ‘ice cream’ — and the likelihood a consumer will click on the ad if it is exposed.

If you’re new to CPC and paid search advertising, and you hear the term ‘auction’ you might assume that if you bid higher than anyone else you’ll ‘win’ the auction and your products will be seen first on the digital shelf. But that’s not necessarily true — the likelihood of a consumer clicking on an ad is an important determinant in where your ad is placed on our shelf. This is why it is so important for new, challenger brands with low awareness to play for the highest spots on the Instacart shelf.

The important thing to remember about our auction model is that you could end up paying less than your maximum CPC bid, but will never pay more.

That concludes this article on 2nd-price auctions and how they work for Instacart Ads. Check out the other entries in our continuing Advertising on Instacart 101 series to get up to speed in a hurry on the fundamentals of Instacart Ads.

Advertise with us to get in front of consumers when they’re searching for products like yours on the Instacart Marketplace. For more information and to get started, visit ads.instacart.com.

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