Google puts a little twist to this deal. Maximum bid price is one deciding factor. The other is Click Through Rate (CTR). CTR is a percentage which is calculated:
For example, if your ad has 10,000 impressions and it is clicked 100 times, your CTR would be 1%. (1%-10% CTR is considered rather respectable!) Google will then use this number and your bid price to determine your rank:
(Of course, it is not a simple equation like this, there are unknown weights and normalizing involved, which we, as the users, do not know!).
So what is the significance of this? It says that the top positions do not necessarily go to the highest bidder. Rather, it goes to best and most established ads. A person with a really high CTR may only have to pay pennies for the top position while a low (or no) CTR ad may pay dollars for the same spot. To some degree, this gives us little people a chance!
Of course, to have a high CTR, you need clicks and to get clicks, you need impressions and a respectable ad position. You have two options here:
1) Patience - Over time, you will get impressions and clicks
2) You can pay for it up front - Raise your bid from the beginning and hope not to get burned.
Either case, you need to have GOOD AD COPY! If people don't notice your ad, they won't click it. Google punishes you for this! As your CTR drops, more money is required to maintain that position. So, for everything good in the world, there always seems to be something bad!
Again, Perry Marshall spends a few chapters on improving ad copy and optimizing your CTR. Check it out!