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Establishing the Right Keywords
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You need to consider very carefully which words and phrases people are likely to use in searching for the service you offer or the product you sell. This requires imagining that you are a potential customer who has never heard of you or your product before. Ask yourself: "what would I enter in a search engine if I was in their position?". The terms you might enter are the keywords and phrases you will need to consider building into your site.
Having worked out which keywords and phrases you hope people may find your business by, you must then assess how much competition there is for these keywords. If, for example, you are selling software, there is no use optimising for that word on its own as there must be millions of well-optimised sites selling software!
However, it is not necessary to spend a whole lot of time seeking for keyword phrases for which there is little competition. The most productive use of time, is to put as many pages out on as many keyword phrases as possible, and wait to see how well they do. Those pages which do reasonably well can then be modified further until they reach the highest position reasonably achievable. This trial-and-error method is actually a better use of time, because researching keyword-competition is so time-consuming and is highly unreliable.
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