Google Adwords -- How Do People Do It?

I've been playing around with Google Adwords a bit, experimenting with a few basic campaigns to figure out how it all works. I was partly inspired by a friend of mine who drove some traffic to his retail store here in Chilliwack using a Facebook Ad campaign over Christmas.

The part that I don't really understand is how Adwords is a good investment at the CPC prices they charge? For example, I was trying to target Vancouver Stock Photography using an adwords campaign. After playing around with a few keyword combinations, it quickly became obvious that the average CPC for something that targeted was between $1.50 and $2 a click. Sure, if you just put something generic up there the CPC usually goes down. But that means you'll have a lot of people on your site that aren't entirely interested in what you have to offer, especially if you're a niche market.

So if you assume CPC of $2/click, and maybe a 10% conversion on people that actually hit your site, that means you need to make at least $20 profit/sale on Internet visitors from your ad campaign to break even. If your margin is 50%, that basically means you have to be selling at least $40 items to make it work, or at least selling a combination of products that amounts to greater than $40.

So it seems like Adwords and other CPC advertising campaigns aren't really suitable for cheaper products, not unless you have an amazingly high conversion rate.

Anyone with experience using Facebook Ads or Google Adwords have any comments?