When it comes to online advertising - and Facebook especially - auctions are pretty similar to offline ones, where you bid for an object, like an art auction. The key difference here is that, instead of bidding for a painting among art lovers, you are competing with other advertisers to bid for the desired ad impression.
The principle of offline bidding is that the highest bidder wins - it is a bit more complicated than that for online bidding. How much you are willing to bid is a key factor, but for ad platforms such as Facebook, it is also crucial to maintain an engaged user base by showing only highly relevant ads, the right amount of times, to the right users.
How is Facebook doing that?
Facebook oversees the content quality of the ads that are being placed, regardless of how high the bids may be, and generates a final bid value in the back, taking many different factors into consideration.
Earlier we talked about keeping the audience engaged: this is where Relevance Score comes into play.
The Relevance Score, as defined by Facebook “ is calculated based on the positive and negative feedback we expect an ad to receive from its target audience. The more positive interactions we expect an ad to receive, the higher the ad’s relevance score will be.”
Key Point: If two advertisers bid the same amount, then the ad’s relevance score will be the deciding factor, and the best one would win the auction.
Second Winning Auction (or VCG Based Auction)
Facebook’s auction is based off of the Vickrey-Clarke-Groves auction (VCG): in a nutshell, this is a closed auction where you submit a sealed bid (the maximum price you’re willing to pay for an action).
Without getting into the specifics of the algorithms used to sort out who’s the winner, the price you pay is going to be the second highest bid against which you won, to which you’ll add the value lost by the other bidders.
Don’t worry if this seems complex, it’s supposed to be. The aim actually is to make it as difficult as possible for advertisers to exploit the system and overbid any other advertiser.
To sum all of that up: Facebook Ads Bidding was designed to prevent any “gaming” of the system, and aims at making ads as relevant to the user as possible. The bid you’ll choose is always the highest you’d go, but it’s rarely what you end up paying.