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How to get your cost per click cheap? Make sure Quality Score (”QS”) of your keywords are high. Read the overview from Google Adwords Help Center.
For high Quality Score we need to have:

a. Keywords with high historical CTR (good ad copy and appropriate use of negative keywords)

b. Relevant Ad Text with the keyword (I have done an experiment: Keywords that are included in Ad Copy give me a lower minimum CPC. Google wants advertisers to create more targeted Ads for smaller group of keywords.)

c. The quality of landing page?! This is a newly added factor. Google specifically gives guidelines on landing page for quality score. One of the criteria for a good QS is “Ensure that your landing page is relevant to your keywords and your ad text”
By now we probably realize one thing: For a high QS and cheap CPC keyword, make sure the keyword that trigger our ad appears in our ad text and appear in the landing page! (off course not forgetting to use negative keywords to drive up your CTR.)
It leads to one conclusion…more works in creating a finer and more focused Ad Group, relevant ad copies and landing pages for various Ad Groups.

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We all know negative keywords are important, however, most people under estimate its importance.

Basic

You can find the basic on negative keywords at Adwords Blog, matching options in Google Help Center, specific discussion on negative keywords in Google Help Center. Negative keywords filter unrelated keywords that we don’t want them to trigger our ads. For instance, if I am promoting The Apprentice DVD or download with broad match The Apprentice, a user search on The Sorcerers Apprentice would triggered my ads. In order to filter users who search for The Sorcerers Apprentice, I would added Sorcerer and Sorcerers as negative keywords.

Negative keywords affect keywords with Exact Match

From my experience and emails with Adwords Support team, it seems negative keywords affect CTR of Exact match. The Ad Rank of the Ads that are triggered by these Exact matched keywords is affected by lack of negative keywords. In one of the email reply from Adwords Support, it was stated that “For historical CTR, keywords in the three different matching options would share the same historical CTR.”

In such a case, a low CTR of Broad match and Phrase match will pull down the Ad Rank of Ads triggered by the exact match of the same keywords. When we use all match options in our campaign, we cannot afford to have without negative keywords.

For example, if we have
1000 impressions with 20 clicks for the apprentice,
1000 impressions with 30 click for “the apprentice”, and
1000 impressions with 100 click for [the apprentice]
What is the CTR for Ad Rank when the exact keyword [the apprentice] triggers an ad? 10%? Not really. From what I understand, it is 5% (140clicks / 3000 impressions)

So, when you use more than mere exact match in a campaign…you must have negative match.

How to use negative keywords correctly?

Negative keywords prevail over all other match options. For instance, in the case below:
-tennis
red tennis shoes
“red tennis shoes”
[red tennis shoes]

All the above keywords (including that of exact match) will not trigger ads. I do aware of other opinions in certain forums that the exact match will trigger ads despite the negative keywords. However, this was what I experienced and confirmed with Adwords Support.

Where do you get negative keywords?

Under your nose.

There are two places to get negative keywords, and both places are under your nose. First place, when you get a list of keywords from a source, DO NOT throw away the unrelated or unwanted keywords. Turn them into negative keywords. Second place, when you realise that a keyword does not convert, do not just delete it from your AdGroup. Turn it into negative keyword!
Here is another good write up on finding negative keywords from various places.

Quickly convert keywords into negative keywords with AE

Use Adword Excelizer.

First, carefully group the unrelated/ unwanted keywords into one column. Then, in one click, the entire column of keywords are turned into negative keywords, copied and ready to be pasted into text box in Adwords.

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