The big drawback since Pay-Per-Click has become so popular is the rising cost for the advertisers. Clicks that used to be $0.10 are now way over $1.00 and it's likely to get worse because more and more people are discovering this effective method to attract visitors.
But your bids are not the only consideration for the placement of your ads (at least not with Google). Bidding top dollars does not guarantee the desired spot (but it helps to give your ads an initial boost), since Google applies a "secret formula" to determine your Quality Score.
"Quality Score is the basis for measuring the quality of your keyword and ad and determining your minimum bid. Quality Score is determined by your keyword's clickthrough rate (CTR), relevance of your ad text, historical keyword performance, and other relevancy factors. The higher your Quality Score, the lower your minimum bid and price you'll pay per click." (See: Google AdWords Learning Center - Basic AdWords Features and What is 'Quality Score' and how is it calculated?)
What does this mean? It means a couple of things:
If a keyword within your AdGroup triggers impressions of your ad but doesn't receive clicks or receives only a small amount of clicks, Google reserves the right to determine that this keyword might not be relevant to your ad text. This does make sense. Consider removing the affected keyword(s) from the AdGroup and create instead a new AdGroup for it that better suits the term. Having underperforming keywords in an AdGroup hurts its overall performance and decreases your Quality Score.
The part that refers to the Historical Keyword Performance is a little harder to overcome, since as a new advertiser with a brand new campaign and brand new keywords you're always at a disadvantage. There is no historical data, period. So you slowly have to work your way up, by proving to Google your keywords are highly relevant to your ad with a high CTR. Unfortunately this also means bidding as high as possible in the beginning because otherwise your ad won't even be displayed and you can never aggregate clicks in the first place. It's a Catch 22, because it means spending more money than necessary to get your foot in the door.
When can you expect to see results? It depends, but the better the overall campaign structure and the higher the initial bids, we've seen considerable changes within 1-4 weeks.
"Other relevancy factors" however is as cryptic as it gets. What is relevant to Google?
The quality of your landing page, for example. Yes, Google "looks" at the landing page linked to your keyword(s) and/or ad to see if it's relevant to your keyword(s) and your ad text. Make sure it is. Make sure it's highly relevant and maybe even solely relevant to that very product and/or service you are trying to sell or promote (See: Website Optimization for more information). Optimized landing pages can increase your Quality Score within hours. See Google's Landing Page and Site Quality Guidelines.
Newer (exactly since April 2008), but no less relevant is the loading time of your landing page. Users hate to wait and Google knows it. Speed it up, make it simple. If users have to wait forever for some backend database to respond or for a lengthy Flash animation to load, Google adds negative points. See Google's How does load time affect my landing page quality? for more information.
