Excerpt from: Don’t Waste Money on Google Adwords
You get the winning bid in Google AdWords by a combination of bidding a higher amount than your competition and by maintaining a higher quality score.
Google AdWords uses a bidding system to determine which ads get placed, where they get placed on each page, and how much they cost when clicked. The bidding system is based in part by raw numbers: higher bids take precedence over lower bids.
However, since Google strives to provide relevant search results, Google tries to make sure the most relevant ads are placed for each keyword searched. Therefore, Google assigns a quality score to each keyword, which is based on how relevant the keyword is to your ad and to your website landing page.
So, when Google determines which ads run where and for how much, they use a combination of bid and quality score. Thus, sometimes a lower bid will trump a higher bid if its keyword quality score is higher.
To learn more about the proven techniques for winning the bid in Google AdWords, read Don’t Waste Money on Google AdWords.