Google Ads is pay-per-click advertising meaning that ads are displayed for free, and you are charged for a click.

Let's aim to understand the process.

First, what do advertisers want? They want to show ads for their website on the search page, for certain keywords.

what keywords? They can target some queries:

• Exact match. user searches for "sneakers"

• Phrase match:

  Let’s assume that you’ve added the phrase match “moving services NYC to Boston” to your keywords. With phrase match, your ads may show when a user searches for either “affordable moving services NYC to Boston” or “NYC corporate moving services to Boston.” The word order (and the additional emphasis on affordable or corporate moving) won’t affect the display of your ad because it’s clear that the meaning of the keyword is contained in the search: the user is in need of a service to move to and from the same cities.

  However, if a user searches for “moving services Boston to New York City,” phrase match recognizes that the meaning of the keyword is no longer maintained, so your ads won’t show. With phrase match, a user’s word order matters only when it changes the intended meaning of your keyword

  Some examples:

  phrase match holidays in zambia will match the query: holiday spots in zambia

  phrase match womens boots will match new womens size 37 boot

• Broad Match: variations of the keyword, including synonyms, misspellings, related searches, and other relevant variations.

• Negative keywords: Advertisers can also specify keywords for which they do not want their ads to appear.

Advertisers create an ad by defining the:

• headline
• description
• display URL
• ad extensions (phone numbers, location, links, text callouts)
• images and videos
• ad copy

Q: what does the UI for creating an ad look like?

Advertisers set the maximum price that they are willing to pay for a click, aka the maximum bid.

At query time, Google computes a quality score for their ad, which depends on:

• quality of landing page
• expected click through rate
• relevance to user intent

Google then computes the ads' AdRank by multiplying maximum bid and quality score.

Ads are ranked and shown by decreasing AdRank. Ad placement varies but it is usually on top (above organic results).

The actual cost per click that you pay is computed as:

ad rank of the ad below / quality score of YOUR ad + $0.01

= max bid of ad below x quality score of ad below / quality score of MY ad + $0.01

So I pay less if I improve my quality score.

From google:

Actual CPC is often less than max. CPC because with the Google Ads auction, you only pay what's minimally required to clear the Ad Rank thresholds and beat the Ad Rank of the competitor immediately below you. And if there are no competitors immediately below you (for example, if no competitors other than you have cleared their Ad Rank thresholds), you only pay the reserve price.

We combine the auction-time ad quality (including expected clickthrough rate, ad relevance, and landing page experience), the max. CPC bid, the Ad Rank Thresholds (= min Ad Rank required to be shown), the competitiveness of an auction, the context of the person's search, and the expected impact of assets and other ad formats to determine Ad Rank. When estimating the expected impact of assets and ad formats, we consider such factors as the relevance, expected clickthrough rates, and the prominence of the assets or formats on the search results page.

Assume five advertisers are competing for a maximum of four ad positions above search results on the Google search results page. The respective Ad Rank of each of the advertisers is, say, 80, 50, 30, 10, and 5.

If the minimum Ad Rank necessary to show above the search results is, say, 40, only the first two advertisers (with Ad Ranks of 80 and 50) exceed the minimum and show above the search results. The advertiser with the Ad Rank of 80 pays just enough (Ex: rounded up to the nearest billable unit, which in the U.S. is $0.01) to beat the advertiser with the Ad Rank of 50. Since there’s no other eligible competition, the advertiser with the Ad Rank of 50 pays just enough to beat the minimum Ad Rank of 40.

Thresholds are determined dynamically at the time of each auction based on various factors, including:

• Your ad quality: To help maintain a high quality ad experience for consumers, lower quality ads have higher thresholds. (so the threshold changes for everyone???)
• Ad position: Ads that appear higher on the search results page have higher thresholds than ads that appear lower on the page. That way people are more likely to see higher quality ads higher on the page.
• User signals and attributes such as location and device type: Thresholds can vary based on user attributes, including the location of the user (for example, thresholds can vary country by country) and the device the user is using (for example, mobile versus desktop).
• The topic and nature of the search: Thresholds can vary based on the nature of the user’s search terms. For example, thresholds for wedding-related searches may be different than searches for basket-weaving classes.

The google-ads glossary is pretty useful.