Let’s assume that you sell wetsuits from your website. There are other companies out there interested in the search term “wetsuits online” and that these other companies also have AdWords search campaigns set up. Google’s systems constantly run auctions to decide the position of each company’s ad when someone runs that search on Google or another search site that is part of Google’s network.
The position of your ad depends on two factors – how much you are willing to bid for someone to click on your ad (your “maximum cost per click”) and your “Quality Score” for the keyword ‘wetsuits online’. Getting a good Quality Score depends on things like the relevance of your ad text to the search, the relevance of that page of your website to the search, how many people typically click on your ad when they see it in response to that search (the ‘Click-Through Rate’ or ‘CTR’) and all sorts of other factors. By far the most important is CTR. Improving your Quality Score is definitely more of an art than a science, but it makes a huge difference to the success of your campaign.
You pay Google when someone clicks on your ad, not when they see it. That click will take the searcher to whatever page of your website you told the ad to point to. (So if you have a surf shop in Newquay, and you have an ad running in response to the search term “wetsuits online”, you would probably want to link not to your homepage, but to that part of your online shop selling wetsuits.)
You can set a maximum bid that you are willing to pay for someone to click on your ad. Google will tell you for each keyword how much you would typically have to pay to get your ad on the first page of search results and how much you would typically have to pay to get in those prominent positions at the top of the page. (Don’t forget that Quality Score affects this as well as cold hard cash.)
You also set a limit of how much that you are willing to spend each day. Once you reach that budget, your ads won’t appear until the next day. Google is also clever enough to automatically vary bids to get you the most clicks within your budget if you use ‘automatic bidding’, although there are plenty of occasions when you would want to set a bid manually.
And with some minor changes to the code of your website, not only can Google monitor how often your AdWords ads lead to actual sales (or other desirable outcomes), it can automatically optimise your bids to make those “conversions” most likely.