Traditionally, bidding on clicks in a search engine has been a hit-or-miss proposition. You set the MAXIMUM you are willing to pay for a click, and then your actual click cost usually ends up well below that. To play the game, you often have to be willing to bid high to get your actual cost about where you want it. But you also run the risk of getting burned by being forced to pay what you bid.

Google has an ad pricing method that reduces your risk - preferred cost bidding. In this new method, you don't specify a maximum bid - you specify an AVERAGE price you are willing to pay for clicks to your site.

For example, if you know that, based on your historical conversion rate, you can afford to pay a maximum of $.50 per click to achieve your desired return on investment, then you can set a preferred cost per click of $.50. Google will then adjust your ad rankings on the fly to get your average cost per click as close to $.50 as possible. You are freed from worrying about getting burned by bidding more than you really want to pay.

To make this technique work, obviously, you have to understand your numbers. You need to know how many people who click through to your web site become customers and how much profit you earn on them. If you know the lifetime value of your customers, that's even better. But as long as you know how much you can afford to pay to generate a sale and what your conversion rate is, you can figure out how much you can afford to pay for a click, and use that as your preferred cost.

Setting up preferred cost bidding in your AdWords account is easy. First log into your account and click on the campaign for which you would like to use preferred cost bidding. Then go to the Campaign Settings screen for that campaign by clicking the “Edit campaign settings” link. Then, in the Advanced Options section, click the “View and edit bidding options” link. Then click the radio button next to the Preferred cost bidding option and click Save and Continue. This turns on preferred cost bidding for the campaign, but you still have to specify your preferred bids. You can specify a default bid for all of the keywords in your account as well as bids for individual keywords, just like with standard bidding.

I caution you against setting a preferred bid and then walking away. Pay attention to your campaign data. If you have set your preferred bid too low, you may end up getting far less traffic than you want, or your traffic may become less profitable. For instance, it may be the case that to meet your preferred bid Google only shows your ads late at night, which may or may not be a good time to display your marketing message.

Preferred cost bidding could save you a lot of time and frustration, but you should be realistic in setting your preferred cost, and diligent in watching what happens with your account.