(FORTUNE Small Business) – Custom Golf Clubs will cost you a mere $1.57. For an "injury lawyer," you'll need to shell out quite a bit more: $19. But a "pet monkey" can be yours for the fire-sale price of just 13 cents.

What are we talking about here? Those are the recent top bids per click for those particular Yahoo paid-search terms. In other words, if you type "custom golf clubs" into Yahoo's search engine, the outfit behind the $1.57 winning bid (as I write this, it's GolfClubsAndMore.com) will show up first in Yahoo's sponsored results--right at the top of the page. (Other search engines, such as Google and Ask Jeeves, offer similar sponsored listings.) Should you then click on this entry and visit the website, the people at GolfClubsAndMore.com will pay Yahoo exactly $1.57 for your eyeballs. They're hoping you buy a new titanium driver and make it worth their while.

Pay-per-click search-engine advertising--also known as "keyword bidding"--was an exotic fad just a few years ago. It's now growing in sophistication and popularity, particularly among small businesses. According to eMarketer.com, search advertising made up about 40% of last year's $9.6 billion online ad market in the U.S., up from 35% in 2003. It is expected to reach 42% this year. "Paid search is especially important for small businesses," says online marketing consultant Hollis Thomases, president of WebAdvantage.net. "It helps level the playing field."

That feature is particularly powerful when applied to specialized search terms. Do a search for "slingback shoes," for example, and you will find small e-commerce sites competing head-to-head with major national retail chains.

Paid search isn't the only marketing game on the Internet, of course. The art of search-engine optimization seeks to render a website more friendly to search-engine spiders and thus more likely to show up in free search results. Key strategies here are (1) eliminate flash animation, which confuses the spiders, and (2) always post a site-map page, which makes it easier for the spiders to find their way around and crawl all your pages.

Despite all the hype about paid search, the pitfalls are legion. A careful search-engine strategy is vital, lest you blow your ad budget without selling a single pet monkey. So what are the secrets?

Randy Downs is Internet sales manager for WarrantyDirect.com, a website that sells extended vehicle warranties. He has enjoyed tremendous success with keyword bidding in recent years. Most of Downs's customers are looking to compare the warranty offer from their car dealer with warranty offers from other companies. They often begin their research by loading up a search engine, typing in a phrase such as "automobile extended warranty," and checking out whichever sites show up. Downs wants WarrantyDirect.com to show up big.

"We had played around some with online marketing, but we didn't fully commit to it until early 2004," says Downs. At that point he hired Andrew Wetzler, president of a Boca Raton consultancy called MoreVisibility (one of at least 200 Internet-search consulting firms in the U.S.; MoreVisibility's major competitors include Iprospect.com and 247realmedia.com).

Wetzler tailored a keyword bidding strategy for WarrantyDirect.com. "We now bid on about 40 different keywords," says Downs. "Our bids range from a low of about 5 cents per click for something like 'Mazda car warranty' up to a high of about $7 to $8 per click for 'automobile extended warranty.' "

Downs will change his bid on a single term as many as eight times a day--often in the middle of the night or on a weekend. He constantly jockeys with competitors for bid positions. Yet the highest bid is not always a winner in terms of ROI. There's a premium to pay for first position in the search results, but any of the top three bids will receive nearly equal exposure (grouped together at the top of the search-results page or down a column on the right side). The winning move is often to come in second and pay much less per click for a nearly identical outcome.

The machinations don't stop there. Downs adjusts his bids based on the day of the week. Over several years he has noticed that on certain days the clicks tend to come from serious buyers rather than window-shoppers. It makes no sense to pay the same amount per click for these radically different conversion rates. Downs won't say which days yield more car-warranty sales. Wetzler notes that business-to-business companies tend to see higher conversion rates on weekdays, while entertainment companies such as movie theater chains often convert more clicks on weekends. Those trends influence the daily value of the various search terms.

Even local firms can benefit from a search-engine strategy. "With local search, which is available now on the major search engines, it's possible to have your ads show up only for people who log on in your area," says Wetzler. "The search engines can figure out geography based on an IP address, so that a local interior designer in Cincinnati won't be paying for useless clicks from Los Angeles or Japan."

Bidders should avoid overly general search terms, which tend to yield lower conversion rates. Downs doesn't bother to bid on "warranty," for example, because most people who enter that search term aren't even looking for a car warranty.

Another common error is to focus on keyword bidding while neglecting your website. Potential buyers who click on your ad only to reach a muddled site will soon leave. And there have lately been reported cases of "click fraud," in which saboteurs drive up a rival's costs by repeatedly clicking on his keyword ad. The search engines are working on solutions to that problem. They often catch the perpetrators and offer refunds to bidders.

Downs's efforts have paid off. He now spends $30,000 to $35,000 a month on paid search. WarrantyDirect.com collects more than $20 million in annual sales. From 2003 to 2004--when Downs began paid-search marketing in earnest--sales rose 55% and earnings soared 82%. Downs estimates that every $1 spent on paid search yields $14 in revenue. He won't say how much he paid MoreVisibility to set up the program, but Wetzler says annual fees range from around $10,000 for straightforward sites such as WarrantyDirect.com to six figures for more complex projects.

"Pay-per-click and search-engine optimization have been hugely important to boosting our revenue," says Downs. "Credit also goes to our sales force, but step one is bringing people to our site."