Search: Google's Guesswork
Google AdWords is an auction, but it doesn't work the way you might expect. In an AdWords auction, the highest bidder doesn't always win, and the amount you pay is based on a number of factors in addition to your bid.
These and other potentially unexpected results occur because the winners and fees in an AdWords auction are based upon a combination of bid and quality score, rather than just the bid itself. In fact, quality score may be the single most influential factor of your success or failure with that keyword.
What Is Quality Score?
Google describes quality score as "an objective measurement of quality" that reflects how suitable and satisfying a keyword and its associated text ad are to people whose searches are matched to that keyword. The more likely Google thinks it is that an ad will get clicked, the higher the resulting quality score.
A quality score is assigned to each keyword in your account to reflect Google's assessment of how well that keyword is expected to perform. It's used to assist and encourage bids on keywords that are expected to perform well for you, and to hinder and discourage bids on keywords that are expected to perform poorly.
The "performance" Google's focusing on is the likelihood that a given text ad associated with a specific keyword will satisfy searchers and earn their clicks. Perhaps not coincidentally, keywords that perform well based on this definition also maximize Google's earnings by generating more paid clicks from more happy users who then search on Google more frequently.
Quality score is a prediction about the future based on the past. It's determined by a mathematical calculation including a wide range of information on the structure and performance of your account as a whole, and of your keywords, text ads and landing pages. There is no human subjectivity involved. Like any prediction, it's really just a best guess, but because it's a computer-generated guess, it's constantly recalculated as more history and better data become available.