I have a general question about the way ads are placed based on keyword quality score and bid because some of my ad placement are not making a lot of sense to me. Here is an specific example of what I'm talking about: Keyword: widget Max bid: $1.00 Avg. CPC: $.21 Quality score: 7/10 Avg. ad placement: 2.9 Why is it that though I'm willing to bid $1.00 I'm only getting about a 3 average placement in this situation? Is it just that one or two of my competitors have great quality scores and they are being given good placement at a very low price? I would think that I should be able to out bid and get a better average position here. Also, consider that I have examples where I'm bidding $7.00, paying $3.00, with a similar quality score and am getting even lower placements. I'm having a tough time figuring out how to improve my placement.
Position is determined by multiplying your QS with your bid. This is called your ad rank. Obviously, you have a few competitors with a higher ad rank and why you show in third place. There's more in the Adwords FAQ.
Your bid is not enough to get you a high position. As Lucid explained, your position is determined by your Ad Rank. (Quality Score x Max CPC Bid) Increasing your bid will increase your Ad Rank and put you in a higher position however that is a very inefficient way of improving the position of your ad. You are much better of working on your Quality Score. Judging from your current QS, most likely you have to improve your Click Through Rate. So make your ads more enticing and relevant to the users. As you increase your CTR, your QS will also go up, improving the chances of you getting a higher position.