Google AdWords works a bit like eBay. When you bid for keywords, you pay once cent more than the bidder below you — rather than your maximum bid.
So, when you set a maximum bid, you usually never pay that price. Instead, you almost always pay less.
Why is that important? If you pick the right keyword combinations and achieve decent click through rates (CTR), then you’ll find your AdWords costs coming down. You’ll gravitate to word combinations that are popular, and you’ll pay that one cent more than the next guy — thus putting you in a good position at a low cost.
The key, though, is nailing that CTR. With a low CTR, you’ll be lumped in with ads that are paying lower prices. With high CTR, the popularity of your ads guarantees lower prices. That’s how Google AdWords is set up. They want your ads to be clicked on frequently, and you’re rewarded for that with lower prices. That’s how you can get to the point where you’re one cent higher than the next guy.. but at a fairly low rate in the first place.
I know this sounds a little confusing. My advice is to experiment and play with it. Make sure you focus on CTR. Re-write your ads and measure the CTR success of each ad variation. Find out what produces high CTR, and put your money there. You’ll end up paying lower prices for your AdWords.