[geetanjalityagi]

The OP probably needs to optimize his ads (i.e. tune them) and the conversion funnel. In my five years of working at Google as an AdWords manager (I don't work there anymore), I've seen cost-per-click and bids rise consistently especially for Google search. This has a lot to do with competition and limited real estate. However, Google maintains something called Quality Score which is analogous to page-rank that determines the bid required for an ad to show. Quality Score is based on the keyword - ad text - landing page relevance. With a high Quality Score you can get clicks for a much lower cost. Some experiments put this at about 5% per unit of quality score change (Quality score is on a scale of 1 to 10).

Low quality score is also a reason your ad might not show even if there is no competition – Google assumes that the relevance of the ad is low, and tries not to show irrelevant ads to user, even if it means not showing any ads. Of course this is not fool proof, but that is the idea in general.

Getting a click is only half the story. Actually getting the user to convert and buy your product depends as much on your ad as it does on your site. Is your keyword related to your ad? Does the ad landing page offer what the ad text promised? How easy is it for a user to buy your product or, convert? How many steps does it take to get to your thank you page? Is your sign up process too long? Most people tend to focus too much on bids and ignore optimizing their ads to improve relevance of the keywords to ads and relevance of ads to their site. Doing this can help increase Quality Score which significantly brings down cost per click. It comes as a surprise but small tweaks can make huge differences - and increasing bid or cost per click is not the right answer in most cases.

Plug: I'm one of the founders of Optmyzr (http://www.optmyzr.com) and we offer optimization services and automated tools for optimizing AdWords campaigns.

[JimWillTri]

Can you give an idea of how much lower the cost per click could be with a very high quality score (ie 5% of Googles suggested cost per click)?

"With a high Quality Score you can get clicks for a much lower cost. Some experiments put this at about 5% per unit of quality score change (Quality score is on a scale of 1 to 10)."

[geetanjalityagi]

As I understand from your question, there are two things here one is average cost-per-click which is how much you actually pay for each click and this is usually lower than how much you bid (max CPC). I've seen avg. CPCs fall by 10 - 50% (depending on the industry) when Quality Score changed from 5 to 7 for keywords. You can actually track Quality Score and overlay it with avg. CPC and other stats to see a correlation for your account. We created a tool for doing this. The second is Google's suggested cost per click which is the recommended first page bid that Google shows next to each keyword. This is a function of your Quality Score and competition. You'll notice that keywords with a low Quality Score have a relatively high required first page bid. Please feel free to email me (geetanjali att optmyzr.com) with any questions!

[JimWillTri]

Thanks very much for the detailed answer. That really explains things from Googles perspective. Very nice service you offer. I think that it will serve to save people a lot of money on Adwords.

[kevingadd]

Does that mean that if your quality score isn't high enough, Google will pocket your adwords money and never actually show your ads? That sounds incredibly dishonest.

[geetanjalityagi]

Google charges you only when someone clicks on your ad. So you don't get charged for your ad showing unless someone clicks on it. The way it all started out was to show good quality ads to people. Just like search results the idea is to make ads also as relevant as possible to the user. Not defending Google, just stating facts. Some changes they have made recently (enhanced campaigns) may not be as advertiser friendly as promoted.