The winner’s curse, a finding based on economic theory, should concern brands. It’s the idea that the winner of an auction tends to pay more for the goods than they’re worth. And it’s worrying because more media than ever is bought via auctions. Two of the fastest growing media, programmatic display and paid search, are auction-based. The global spend on these media (pdf) was over $106bn (£75bn) in 2015 according to ZenithOptimedia.

The phrase “winner’s curse” dates back to the 1950s when a spate of oil companies significantly overpaid at an auction for Alaskan drilling rights. Some paid so far over the odds that they went bust. Economists, such as Richard Thaler, investigated the problem and came up with an elegantly simple explanation.

Thaler, one of the world’s most renowned economists, believes that during an auction each bidder makes a private valuation of the goods and then bids up to that amount. Due to a phenomenon known as the wisdom of the crowds the average of all those valuations is reasonably accurate. After all, averaging out the valuations will balance out the errors that each bidder makes. But of course, if the average valuation is accurate, then the winning bid – the most optimistic in its valuation – must be inflated.

So how can brands buying avoid unwittingly overpaying?

If the world zigs, then zag

Auctions are here to stay. Brands can’t ignore them. Instead they need to adapt their bidding tactics by creating a contrarian set of metrics to identify their audience.

Most brands judge the value of an impression by looking for signals about age or income. Say, targeting 18–34s or ABC1 25–54s. However, since this method is commonplace, any brand that uses it will enter highly competitive auctions. And the more participants there are in an auction, the more accurate the average bid and the harder it is to avoid the winner’s curse.

However, since so many brands are formulaic in their targeting approaches, there are plenty of under-exploited opportunities for canny brands. One such approach is to target a broader range of people, but focus on reaching them at opportune moments. This is a sensible approach as there’s plenty of evidence that people’s receptiveness to ads varies from one context to another.

The power of context

The exact context each brand should target will vary, but in our research we have spotted a number of common themes:

• People are more receptive to ads when they’re in a good mood.
• Funny ads become funnier when they’re watched in groups.
• Consumers splash out on discretionary items far more after they have been paid.
• People are prone to switching brands when their life has been destabilised by a big event, like moving house or getting married.

The list goes on.

Best of all, these contexts are easily identifiable and able to target due to the data captured when consumers are online. Facebook, for example, can target ads to those who have just moved house or got married. So the digital transformation which exacerbates the winner’s curse also provides a solution.

Brands that use these contextual signals to identify their audience, rather than relying on tired, demographic data, will gain a competitive advantage by avoiding the winner’s curse.

Richard Shotton is head of insight at Zenith

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