Google Ads search campaigns are used to either drive traffic to your website, make phone calls to your business, or increase mobile app installs. When you launch a search campaign, you are showing users ads that respond to their particular desire which is expressed by the search term they enter in the search engine.
This is more of a sales function than actual advertising. Someone expresses a problem and you, as one of the potentially many advertisers, proposes a solution. This makes search advertising extremely effective and, as a result, makes clicks more expensive than other PPC channels.
When an advertiser bids on a particular keyword, they are competing with other advertisers in an ad auction for a position on the search results page. The amount advertisers are willing to pay for clicks coming from a particular term is based on the value those clicks bring. Users searching for actionable terms, are very valuable as they are readying for a purchase. Because of this, advertisers are willing to pay higher prices for these clicks, since they garner the best value. This can make competing in these ad auctions expensive yet profitable.
People have the misconception that the advertiser willing to pay the most per click with their max CPC bid will have their ad displayed in the top position of Google search results. In reality, the advertiser that gets ranked first in an ad auction is the advertiser with the highest ad rank. When a search triggers a keyword that you bid on, it enters an ad auction.
Google then calculates your ad rank by multiplying your max CPC bid with your quality score for that particular ad auction. Internet users are more likely to click on ads that have a higher position in search results. This is why the top positions are highly desirable.
Each time an ad is shown, it receives an impression. The percentage of impressions that receive clicks is called the click-through rate or CTR. The better an ad answers the search query a user makes, the higher its CTR. So, if an advertiser is willing to pay the most per click, but their ads have a very low expected CTR, Google will not make as much money from showing their ads. After all, this is pay-per-click advertising. Google gets paid per click so Google rewards advertisers favourably by giving them a higher quality score when they have a history of well-engaged ads.
While click-through rate is not the only factor Google uses to determine the quality score, it is the most important. There are other binary factors, meaning either good enough or bad, to consider. Important ones to consider are the landing page loading time and the relevance of the content on the landing page to the term that was searched and the ad itself.