You might want to raise your bid higher than you are comfortable with for now and receive a higher click through rate (CTR). A higher CTR will help you get lower bids and higher positions in the future. Google is looking to see what ads work and the higher ads work better at getting higher CTR. You should also make several variations of your ads and Google will rotate them and find the most effective ones.
The bids are multiplied by your clickthrough rate and your Quality Score to determine your ranking. There are many factors that determine your QS, but the biggest ones are advert text, landing page and match type. Google also apparantly looks at what people do when they land on your site compared to those of your competitors. In summary: Write compelling advert text, and include the keyword if possible (to improve clickthrough rate and relevance) Build a good website, and a very good landing page (there are other threads that discuss this in detail) Use exact match, even if you have phrase and broad match enabled - it'll improve your QS. There are many other things that you can do as well, see my link (below) for a guide to optimising on Adwords...