First of all, I want to talk about how you should bid when you are first setting up your campaign. At the outset, you absolutely need to bid high. Some people are under the illusion that they should start small and work their way up in terms of cost per click. Nothing could be further from the truth. In fact, the correct strategy is exactly opposite of that. When you are first setting up your AdWords campaign, you need to set the bidding high. The specific cost per click is going to vary, depending on the market you are in. But you certainly want to bid enough so that your ad position is on the first page, preferably in position two or three. Note that your ad position is determined not just by bidding, but also by your CTR (click through rate) and quality score. When you are first starting an AdWords campaign, you don't have any CTR or quality score numbers--they need to be built up. So in order to build these up, you need to bid higher than normal so that your ad is shown in a high position. If you do this and write a compelling ad, you will in turn receive clicks. And once you receive clicks, your CTR will continue to go up. As your CTR and quality score increases, then you can start to lower your cost per click and still maintain the same ad position.
Secondly, do not get into any bidding wars over high-volume or super competitive keywords. It's just not worth the cost Google will charge you. And to be frank, most of the high-volume keywords are not that targeted anyway. For example, if I was selling a spyware removal software tool, I would not bid on the word "spyware" for two reasons. The term itself will cost me a small fortune to get on the first page, and it's also not very targeted. After all, someone typing in a general word like that could be looking for any number of things. Instead, spend your time and money bidding on a large number of low-volume but relevant keywords. You will pay less per click, and your visitors will be more targeted. To get the largest list of low-volume keywords, you'll need to invest in a professional keyword research tool. I personally use and recommend Keywords Analyzer, but there are a number of quality products in this market.
Finally, make sure you set a higher bid on exact matches. With AdWords, you can target keywords in three ways--broad match, phrase match, and exact match. Broad match will trigger your ad when any of the words in your keyword phrase is typed. Phrase match will trigger your ad when your keyword phrase is typed regardless if other words are also used. Exact match will only trigger your ad when the exact keyword phrase is typed. I recommend using all three match types for the most amount of clicks, but setting a higher cost per click for the exact match keywords. Doing so will allow you a bit more control of the ad position for that exact match keyword. For example, your ad group may have a maximum cost per click of $0.25 for your keywords, but within the ad group you can further specify that you want the exact match keywords to have a maximum cost per click of $0.60.
Bidding is a complex topic, but you don't have to get overwhelmed. By just following these three simple tips, you are well on your way to an AdWords miracle.