This is a common doubt which arises in anyone’s mind who does PPC.

"I am able to find out what a competitor was bidding on a particular keyword. I know the market very well and there is no way they can make profit by paying that much per click. Why would someone bid 90% or more of the sale price of a product?"

The answer is not as complicated as we think.

It's not uncommon for savvy advertisers to bid amounts that at first glance appear to be ridiculous. There are advertisers who pay $10 a click for products that sell for $15. I think this will become more common over time.
Here's why - Life Time Value. If you're not familiar with that term and want to be a serious player in the PPC market over the next few years you should be.

Lifetime value is the value to you/your company over a customer's "lifetime" with you. How much $$$ do you make from your customers over time?

The point I wanted to make is that savvy marketers don't care if they don't make an immediate return. They know the lifetime value of their customers acquired via PPC programs and use that number to determine what they are willing to spend (bid) to acquire a customer.

What's a customer worth to you? That information can change the way you play in the PPC arena.