1. What is conversion tracking? In online advertising, a conversion occurs when a click on your ad leads directly to user behavior you deem valuable, such as a purchase, signup, page view, or lead. Google has developed a tool to measure these conversions, and ultimately, help you identify how effective your AdWords ads and keywords are for you.
   
   It works by placing a cookie on a user's computer when he/she clicks on one of your AdWords ads. Then, if the user reaches one of your conversion pages, the cookie is connected to your web page. When a match is made, Google records a successful conversion for you. Please note that the cookie Google adds to a user's computer when he/she clicks on an ad expires in 30 days. This measure, and the fact that Google uses separate servers for conversion tracking and search results, protects the user's privacy.
   
   
2. How can it benefit me? When you have access to conversion data in your reports, you can make smarter online advertising decisions, particularly about what ads and keywords you invest in. Given better data, you can better measure your overall return on investment (ROI) for your AdWords campaigns.
   
   For example, Bob owns an online business that sells eBooks. He knows how many clicks his AdWords campaign gets, but would like to know specifically which keywords are converting to sales. With basic conversion tracking, Bob can get this valuable information. With customized conversion tracking, he can also report the dollar amount of each sale and get the total revenue generated by each of his keywords as compared to the total cost of the keyword. With conversion statistics, Bob discovers that the keyword independent eBooks has a return on investment (ROI) of 500%. Consequently, he optimizes his campaign by increasing the spend on that keyword, thus maximizing his AdWords ROI.
   
   
3. How do I set up conversion tracking? To set up Google AdWords conversion tracking on your site, you'll need to place a snippet of JavaScript code on your conversion confirmation pages (the Thank you for your purchase/subscription/visit page). When you activate conversion tracking, Google will transparently assign an advertiser ID and enable conversion tracking for your account. The code snippet will show a visible Google Site Stats image on the user-facing end pages to indicate that a conversion has been completed. Here's what happens:
   • A user clicks your AdWords ad.
   • Our googleadservices.com server places a temporary cookie on the user's computer.
   • If the user reaches one of your designated conversion confirmation request pages, his/her computer passes back the cookie and requests that our server send the conversion tracking image.
   • Google records the conversion event and correlates it with your campaign, Ad Group, URL, and keyword.
   • At the next report update, you'll see conversion statistics from the campaign level down to the keyword level.

I'm surprised no one has mentioned Google Analytics yet