Google AdWords, of course, is Google’s advertising system. Here’s how it works in three steps. 
First, you as the advertiser, identify keywords that your customers input into the Google search engine. If you sell ski trips to Colorado, for example, you’d identify keywords in AdWords such as ski trips, or Colorado ski vacations. Second, you create a Campaign, Ad Group, and text Ad on Google. Your ad should explain what you sell (e.g., ski trips in Colorado), and something unique about your value proposition, such as ski trips for experts. Third, you enter a ‘bid per click’ (often called a ‘cost per click’) that you are willing to pay Google when someone sees your ad and clicks from Google to your website. You pay if, and only if, the searcher clicks on your ads. Those are the basics of what Google calls the Search Network, and it is what most people think when they ask ‘How does Google AdWords Work?’
It Gets Complicated
Sounds easy? Well how AdWords works is deceptively simply. But it gets complicated. One complication is keywords. All keywords are not created equally and to advertise successfully on Google AdWords, you need to really research your keywords. You need to know, for example, the volume (is this keyword actually searched a lot on Google?) and the value (is it valuable to get a click?). (You can use the Google AdWords Keyword planner to research keyword ideas, volume, and value). Here’s there’s an important distinction between an educational keyword or phrase (such as ‘What is skiing?’) and a transactional keyword phrase (such as ‘best Colorado ski vacations’). The former is likely to generate clicks but no sales, while the later is more likely to end in a sale. The next complication has to do with bidding. Most of the time your competitors will also have figured out the high value, transactional keywords and so they will bid up the value of keywords in the Google AdWords auction. Your best keywords are ‘undiscovered’ but of high value and sufficient value; these can be referred to as ‘secret fishing holes,’ or ‘riches being in the niches.’
Yet another problem has to do with how to write great ad copy. While Google (and many so-called AdWords experts) will advise you to write copy that is so enticing it gets a lot of clicks, and hence what is referred to as a high Quality Score, that’s not necessarily the best strategy. Assuming you have a transactional and not an educational keyword, you still have the problem of tire-kickers. If your ad copy says ‘free pizza’ and ‘free beer’ with every click, you’ll get a lot of clicks but few conversions on your landing pages. So ideally you want to write ads for any pay-per-click campaign that attracts your real customers and repels non customers.
Finally there’s the challenge of the Google Display Network. This is a parallel network to the regular Google Search Network and places your ads on a network of blogs, videos, parked domains, social networks, YouTube, and even Gmail. This is a totally different animal and isn’t really the same as the Google Search Network. I’d recommend you avoid it, at least at first, and always set up any given Campaign in AdWords to run only on either the Search Network or the Display Network (but never both in the same Campaign).
So there you go. That’s how AdWords works in three basic steps plus a few gotchas to watch out for. Find out more in the AdWords Workbook.
