Research your keywords. Qualify your traffic. You need to start off with a huge selection of keywords and slowly wither down to the most cost effective and relevant one. Say you promote widgets. You cannot just go biding on the keyword widgets' as it is bound to have loads of competition. What you can do is expanding on it, drilling down going deeper. Buy blue and cheap widgets'. You may not get loads of searches but you know that it is very targeted and it is cheap.
Rule 2.
If you are selling something, make sure you weed out those who are looking for free stuff. One way of doing this is to include a -free' in your campaign so essentially all surfers searching for free + your keyword will not get to see your ad. Also you can include your price in your ad. True, it will reduce click through rate but you know that those who do click are more likely to convert.
Include your keywords in your ad. Say you bid on the word big black hairy wig' selling wigs. It would be prudent to include big or black or hairy or wig. Best would be to include everything because your keywords in your ad gets BOLDED and people related it to relevancy.
Rule 4.
Your headline. Make an attention grabbing headline to attract people to see your ad. Your headline is the vital link to whether somebody clicks on your ad or not. To get some tips on writing compelling headlines, you can download a free copy of my report.