Forgive me if I am repeating widely known information, but to me this is a revelation.
The price of a keyword is not only based its quality score, but the overall revenue that the ad takes away or adds to any search performed on it. What do I mean by this?
Say you have an ad that has been by itself for a certain keyword. It has a bid of, say, 50 cents a click and a CTR of 1 percent. So, google can say that they make, on average .5 cents every time this keyword is queried.
Now you come along and bid 20 cents a click on the same keyword, with much more compelling ad copy. So much better, that you get a CTR of 2 percent. However, in doing so, you also steal clicks from ad #1, and their CTR goes down to .5%.
Now, if you do the math, Google is only making .45 cents on average each time the keyword is displayed, even though 2 ads are now being displayed and one has a significantly higher CTR.
So, what do they do? Make ad #2 inactive for that keyword of course!
And of course with more than 2 ads the same type of calculations are occurring on a more complicated level.
Three Revelations (At least for me):
1. High CTR can hurt you, especially if it draws clicks away from other higher bidding ads.
2. It is more difficult than previously imagined to decrease your CPC by increasing you CTR.
3. It is all about dollars and cents with them. Relevancy, "Quality" and other esoteric terms are, most definitely, in the backburner. They are a corporation and want to MAKE MONEY.
By the way, I have been lurking for a while and want to thank everyone for their great input so far. I am only 22 and while my friends work the 9-5 I wake up whenever I want.