The Importance of a High Clickthrough Rate:

Google lets searchers determine the relevancy of the ads. Price for Google
AdWords is a function of price per click * click through rate. Google uses the
average click through rate from the 1,000 most recent ads in this calculation. This
means if you know how to get a high click through rate you can dominate Google
AdWords by serving up ads at a far cheaper rate than what your competitors are
paying. The following table gives examples of how the Google system calculates bid prices
and ad positions. Observe how some low priced ads appear above high priced ads
because they are more relevant. Also observe that actual click cost sometimes varies
widely when compared to max bid price. Some clicks are at times expensive and at
other times they are cheap. It is the average click cost that matters, since that is what
you are paying. Max bid does not matter since sometimes it can widely depart from
actual click price. For example, I have seen a $6.00 max bid which had clicks go for
77 cents.Distribution buys further distribution. Off the start you will want to overbid slightly
as you will be competing against the best ads that have developed over time in your
niche.
The bid prices Google suggest are often somewhat high. I usually cut the suggested
bid price by 50-75% when I first start an account. I then monitor closely and
change it to try to maintain decent ad position.