(Knowing your niche and budget from other posts) it's not going to be easy for your site, but to answer the original question: AdWords rakes in Billions because it gives most people a good ROI.
I say most people because there will always be people who lose money on any advertising medium, AdWords is easier to set up than magazine publishing or TV so you have to be careful you don't get involved in bidding wars with people who don't know/care about ROI (think Branding campaigns and other new users).
One of the first things you should do is establish at what point a visitor becomes non-profitable, then you can plan your advertising around that. If your answer is that any cost leads to a loss (as it will be for your currently-free service) you should ask yourself if you have the resources to fight with others in the industry/niche?
It's tough to take, but AdWords does not work for everyone.
for adwords, use phrase and exact match (not broad), monitor your roi closely, set budget limits in case something goes wrong, use lots of negative keywords, being a sniper not a shotgunner, use small ad groups, state a compelling reason to visit in your ads that speaks to the consumer.
and print out this post and hang it above your desk:
[webmasterworld.com...]
(see post by AdWordsAdvisor2)
Is it possible to make a living from running Adwords sites?
Some advertisers have a product or service that they wish to advertise, and use AdWords to 'drive' very targeted traffic to their site. (BTW, some of my favorite advertiser emails are from smaller advertisers who are so successful in doing this that they must periodically pause their campaigns in order to catch up with order fulfillment.)
Other advertisers may not have a product or service, but decide that they want to use AdWords as a tool to earn a living - and then develop ways to do that.
I would say that, of these two paths, the second one is less straightforward - and may require more work to really get rolling. In either case, though, one key to success is to understand the needs of your potential customers, and make sure that you're meeting those needs in a way that provides substantial value.
Just my $0.02. ;)
AWA