To get to know and understand Google AdSense you first have to know how Google AdWords functions

AdWords

AdWords are small text-only ads that sometimes appear on the right hand side of Google's search results page when you do a search.

They are extraordinarily powerful, much more so than you'd think at first sight and that’s because of these 5 reasons:

1. They are 100% targeted; the advertiser chooses which keywords have to be entered before their ad is shown. This means that you can make your ad appear only in front of people actively looking for information about a topic. You sell fireworks? Then you can set up your AdWords ads so that they show up only when someone enters "fireworks" into Google's search box. You can also restrict your ad coverage to specific countries.

2. You only pay for click troughs. If no one clicks on your ad you don't pay anything, but there is a catch.

3. Google penalizes ads that don't work well because they want only ads that are relevant to the viewer to be seen. Poorly performing ads get disabled automatically. This protects Google's brand from being sullied by irrelevant ads.

4. Google lets advertisers rotate different ads for the same keywords and automatically shows the most effective ad more often. Thus there is an in-built survival of the fittest process going on where fitness is judged by real consumers voting in real time. If they click, your ad stays. If they don't, it doesn't. Evolution can be extremely brutal and fast!

5. Google gives advertisers incredibly detailed near real-time response data so you can monitor and adjust your ad without wasting much money.

AdSense

So where does AdSense come in this?

Well, Google has taken their excellent AdWords program and extended it to non-Google web sites and branded it AdSense.

Key distinction However, AdSense differs from AdWords, instead of looking at the search terms entered into its search box to determine what ads to show, looks at what keywords would be relevant to the web site the ads are to go on.

Example: If you have a site rich in content about fireworks, AdSense technology determines that it would be an appropriate site to post AdWord ads about fireworks on. (Google uses its existing page ranking technology to assess a site's content).

There's a good example of AdSense in action here on a web page about web hosting. This AdSense technology is called "content-targeting".

How you make money with AdSense?

The process is simple.

You sign up for AdSense and if your site is accepted, Google gives you a code to paste into your web pages. It's JavaScript stuff that you can simply add into the HTML of your page.

When someone views your page this JavaScript fetches ads from Google. If they then click on your ad, Google charges the advertiser a click trough fee and shares it with you.

This is entirely automatic so if you have a content rich site with lots of traffic that is not currently making you any money, AdSense is something you should seriously consider.