The important thing to remember is these ads are sold in an auction. You bid what you want to pay for a click on your ads. Bid the most and you have a chance of appearing at the top of the page.
If someone clicks on your PPC listing, they arrive at your website or a landing page, and you are charged the amount you bid. So, if you bid $0.15 per click on "widgets," and that’s the highest bid, you’ll probably show up first in line. If 100 people click on your PPC listing, then the search engine or PPC service will charge you $15.00.
How Can PPC Go Wrong?
For all the good Pay Per Click can do for a business, PPC advertising, poorly managed, can cost a fortune. It’s easy to get caught up in a bidding war over a particular keyword and end up spending far more than your potential return. "Ego-based" bidding, where a CEO or marketer decides they Must Be Number 1 no matter what, can cost much more than any anticipated return. Also, bid inflation consistently raises the per-click cost for highly-searched, highly-competitive phrases.
This inflation is caused by both ego-based bidding and by the search engines themselves, who impose quality restrictions on many keywords. These quality restrictions increase the cost per click even if no one else is bidding.
The Bottom Line...
While the search engines love to say ANYONE can do PPC, it's a pretty fair bet you'll end up with less-than-stellar results unless you have some training and hands-on experience with the process. In fact, it is virtually guaranteed you'll spend far more money than you need if you go it alone. Hard to imagine why the good folks at Google (or Bing or Yahoo) encourage that, right? Please take a look at the graphic below for the Midwest Graffiti PPC Model: