Resources to better understand AdWords.

How does the bidding process work?
It starts pretty simple. Everyone interested in a keyword enters a bid for that keyword. Theoretically, the higher the bid, the higher your ad will appear in the list. But Google takes it a step further employing a concept referred to as "Ad Relevance".

"Ad Relevance" means that Google doesn't look at just the price of the bid, but also a "Quality Score". The "Quality Score" is determined by the Click-Through-Rate (CTR) of each of the keywords, your ad text, historical performance of your ads, quality of your landing page, and more. The actual order of the ads is determined by combining the maximum bids and the "Quality Score".

In simple terms, the ads that are getting the most clicks are given precedence over ads with the same bid amount but are getting less clicks. With really good CTR's, you can lower your bid for those keywords and still appear high on the list.

We strongly suggest that you not try to get the top positions for keywords as these will cost more than ads that are lower in the list and since you only pay for the ad when someone actually clicks on it. We feel that the 3rd - 5th positions are generally the optimal position to get a good volume of clicks, while keeping your Cost-Per-Click (CPC) down.

Google's discussion of Relevenace