In my last post I talked about how Google ranks ads based on what you're willing to pay and how effective the ads are for given keywords. This time I'll shed some light on what you actually pay for each click which is different than what you're willing to pay. It's based on auction rules.

 First, let me go over some basic types of auctions:

1) English Auction - Most common for art auctions, on TV shows, etc. The bid starts low and bidders "raise paddles" to signify they will pay the next highest amount. It ends with a "Going, Going, Gone" statement where the last person to bid the high amount wins and pays that amount.

2) Dutch Auction - The price starts really high and keeps getting lower until someone decides to buy at that price. The first person to "jump in" at a price wins the item and pays that amount.

3) Vickrey Auction - Everyone bids in secret. All bids are compared and the person with the highest bid pays the SECOND highest bid amount.

 Google Adwords uses the Vickrey auction style. This means that the person with the highest bid pays the amount of the second highest bid. The person with the second highest bid pays the third highest bid amount, etc. The reason this auction style is great for adverisers is that no matter how high your bid, you only pay what you actually needed to bid to beat out the next bidder.

From the examples you can see that if your competitor bids $0.45 it doesn't matter how much above $0.45 you bid. You'll always end up paying just $0.45 per click.

So what's the best way to bid? Easy, bid the highest amount that you're willing to pay. You'll never pay more than your max bid and you may pay less. Figure out what value a click has to your company for a given keyword and bid that amount.