By contributor Lynn Truong
Keyword-targeted campaigns are charged on a CPC (cost-per-click) basis. You are only charged when a user clicks on your ad and is taken to your landing page. The CPC rate depends on your maximum CPC bid (the most you're willing to pay per click) as well as Google's internal system of scoring keyword ads. Not only do you set your maximum CPC bid, but you decide on a maximum daily budget, so you never spend more than you have. Once you've spent your budget for that day, your ads won't appear until the next day.
Google decides your CPC rate and how high your ads show by calculating a Quality Score and Rank Number (ad rank) for each keyword ad.
The Quality Score is based on several factors, including how relevant your ad text is to the keywords you've selected, the quality of your landing page, and your current CTR (clickthrough rate). CTR is the percentage of clicks you get when your ad is displayed. It is calculated by dividing the number of clicks by impressions (how many times your ad has been displayed). A high CTR indicates that your ad is relevant and interesting to users, and is rewarded with a better Quality Score which lowers your CPC costs and offers a higher ad position.
Using your Quality Score, Google assigns a minimum CPC bid for your ad. If your maximum CPC bid is less than the assigned minimum CPC bid, your keyword ad will be made inactive. You'll either need to place a higher bid or to raise your Quality Score by creating a better ad and using more relevant keywords to imporve the CTR.