It's how Google makes it's money (or Bing or Yahoo depending on which search engine you are using). Quite simply you pay for the position.
How much you pay depends on how well the page that the ad directs you to (the "landing page") matches the search term, how much other companies are willing to pay to appear for the same search term (their "maximum bid price")
IF YOUR LANDING PAGE IS NOT OPTIMISED FOR THE KEYWORD THAT THE AD IS TRIGGERED ON YOU ARE LIKELY TO PAY OVER THE ODDS EVERY TIME SOMEONE CLICKS ON IT
With Adwords, you need to know your
Average profit per sale (and that means the value of the customer)
conversion rate (%)
From empirical evidence, the conversion rate is usually 1% (actually 25% of all adwords accounts have conversion rates that equal this figure) and you are really doing well if you hit 2%.
The golden equation to remember is :