Is bid price the only factor that controls PPC position?
Sadly not! It used to be the case with Yahoo! Paid search (formerly Overture, and before that GoTo), but now all the search engines apply "quality" filters to their paid search delivery engines.
It's important to remember that for all their altruistic "do no evil" rhetoric, Google (and the other search engines) rely on advertising revenue to survive, and their systems over the last few years have been honed to deliver the best possible return for THEM from a page of advertising, and not to necessarily deliver you, the advertiser, the best return.
Now, "quality" score comes into the equation - that's the primary mechanism for giving preference to some ads in favour of others. Essentially this works by calculating the return on individual ads: clicks x bid = return.*
Compare two ads: #1 delivers 100 clicks at £0.20, and #2 50 clicks at £0.30
100 x .20 = £20 return
50 x .30 = £15 return
Despite ad# 2 bidding 50% more than ad# 1, which do you think gets delivered more? Of course it's ad #1, as this delivers the best return to the search engine. This is justified on the basis that if more people click on the ad, then it must be more relevant and therefore "better". Of course this may well be true - clearly if more people click on one ad over another it must have more appeal.
But unfortunately that doesn't necessarily mean that the ad#1 is "better" in ad quality terms, because other factors come into play - the perception of the advertiser's brand for one: trust is a key part of the buying process (and people don't normally advertise unless they have something to sell), and given a choice of a known (and trusted) brand against an equally good (but unknown) brand, which does the searcher choose? In all probablility, the brand they know (or at least have heard of).
Sadly, this aspect of PPC advertising tends to help the bigger names get bigger, and at the cost the "little guy". To hold position in the results, the less well known advertiser will will have to bid up to keep a fair share of exposure - in the example above advertiser #2 will have to bid twice the cost of #1 to get the same exposure.
This of course raises a whole new set of questions about how important branding is online, but that's not relevant here!
The actual calculation according to Google is Click Cost x Quality Score. The Quality Score is made up of a number of factors including relevancy of the search term to the content of the target landing page, but our practical experience indicates that click rate (and consequently Google's yield) is the most dominant factor.