With permission from the Google AdWords Guide: Novice to Expert to Superhuman -
http://www.AdwordsCampaign.net
Most AdWords campaigns are managed poorly, through either lack of knowledge or an aversion to tedious work. This makes it possible for you to get targeted traffic extremely quickly and easily, using clever strategy together with automated tools.
1. RELEVANCE
A primary aim is to reduce your cost per click (CPC). Google will favour you with a low cost per click if you master the concept of relevance. If you don't, your pay-per-click rate will be high, your profits will suffer, your campaigns will probably fail, and your competitors will beat you.
Google is the undisputed leader (by far) among search engines because it provides searchers with results more relevant than those of any other. When a surfer types in a search term, Google's complex algorithm returns pages that match closely the words searched for.
Google applies the same principle to AdWords advertisements. Ads that are more relevant than others are given preferential treatment. Less relevant ads are allowed to compete, but they are penalized by a high cost per click.
Google AdWords employs two distinct modes of measurement of relevance: A. Robot; B. Human.
A. An automated program compares the search term not only to your advertisement text, but also to the keywords in its Ad Group, to the URL of the specified landing page and even to the textual content of the landing page itself, to determine how relevant these components are to each other. If all four are tightly integrated with the search term, you'll pay a very low cost per click perhaps only 5 cents and still command a high position on Google's first page. Any component that does not match the search term closely causes the CPC to rise, perhaps even by a factor of a hundred!
B. Every time Google displays your ad, it records the fact. This is known as an "impression". If a surfer clicks on the ad, Google records that also, and divides the number of clicks by the number of impressions. The result gives your ad a "click-through" rate (CTR). A similar calculation is made for your keywords that appear in the search term, to give them their own click-through rate. Google AdWords assumes that, if a human clicks on your ad, it is probably relevant to the search term typed in.
As your CTR rises, so do your keywords' Quality Scores, and, as more and more keywords' Quality Scores rise, so does the Quality Score of the entire Ad Group. The higher the Quality Score is, the lower will be the cost per click. Conversely, the fewer clicks your ad gets whenever it's displayed, the lower your Quality Score and the higher your cost per click will be.
How to Increase Relevance of the 4 Components (keywords, ad text, URL, landing page)...
If you create a campaign manually (rather than by "brute force" means), use only one keyword phrase per Ad Group, e.g., "adwords guide", and specify exact match initially. Once the Ad Group's Quality Score has increased, expand it to phrase match also, to capture phrases such as "online adwords guide" and "adwords guide for beginners". (To specify broad match, to capture search terms like "adwords online guide" and "guide to adwords", is impractical unless you use "brute force" software.)
Use the precise keyword phrase in the heading of the Ad Variation, and sprinkle the keywords in the two description lines.
Use the keyword phrase, hyphenated or unhyphenated, in the display URL, e.g., "/adwords-guide" or "/AdWordsGuide". Not only does Google's robot consider it relevant, but humans do, too, and are more likely to click on the ad.
Use the keyword phrase, hyphenated or unhyphenated, in the destination URL of the landing page, e.g., "/adwords-guide.html" or "/AdWordsGuide.htm".
If possible, register domain names, both hyphenated and unhyphenated, containing the keyword phrase. Use the hyphenated one in the display and destination URLs, and redirect the unhyphenated one to the hyphenated one for other promotion purposes.
Use the keywords in the landing page content as follows:
The precise keyword phrase in the tag;
In the and metatags;
The precise keyword phrase in the first heading tag and variations of it in other , , , etc. tags;
Sprinkle the keywords liberally but naturally throughout the content, particularly among the first and last 25 words, but do not commit the Google crime of "keyword stuffing", which is penalized.
Ideally, the landing page should relate ONLY to the SPECIFIC product, service or information being offered in the ad, and the objective of the visitor's search term should be IMMEDIATELY OBVIOUS to his eyes as soon as he lands on the page. If your ad sends the visitor to a web site's general home page, or the visitor has to spend time looking for his objective on the landing page, you'll lose him in seconds and your click cost will be wasted. Furthermore, The Google robot will see the landing page as irrelevant, and the keyword's Quality Score will be reduced, thereby increasing its cost per click.
Here's a quick trick that almost nobody uses because it is so little known. If you must include some irrelevant words that would dilute your web page's content in Google's eyes, "character reference" encode them with one of the free conversion tools available on the Web. For example, the words "New York" are utterly irrelevant on this web page; so, they are encoded in its HTML as "New York".