
Having read the pre-face, you're probably thinking... "Ok, so... I understand that I can't optimize for everything at once, but which words/phrases SHOULD I optimize for? Furthermore, when is it a good idea (if ever) to use AdWords?"
I'll tackle the simpler question first. AdWords (and other "cost-per-click" methods of advertising from other providers) can still be beneficial for getting your name out there quickly, but you should measure the success of these campaigns based on the number of additional sales they yield (tracked by setting up goals in website traffic analytics software such as "Google Analytics"), rather than the number of "visitors" they supposedly bring to your site. Also note that many internet users are savvy when it comes to identifying a "sponsored" result & differentiating it from an "organic" or real search result. This means that while AdWords may be a good way for your company to buy it's way into some quick & easy visibility, the more cost-effective way to market yourself over the long-term is to optimize your site for the words & phrases most-relevant to your business so that you appear in the search engines naturally without having to pay for the exposure.
This brings us back to the first question... which words/phrases should you optimize for? The answer will depend on a variety of factors.
Usually, individuals will create a list of words/phrases based on the industry that they're in & what they think their customers will search for. While this is always a good starting point, it's rarely the finishing point of the "keyword" research phase of the optimization process. Does your company sell to average consumers, or do you target a specific type of person who is already very familiar with the technical language of your industry? If your target is the average un-informed consumer, you might actually be better off asking your mom, dad, or a friend what they would type in if they were looking for what your company does. You'll need to resist the urge to correct them, as the words they come up with might not actually be what you do, but if that's what the average person is thinking when they think of your product or service, it's worth serious consideration!
Ever noticed those little maps that Google sometimes displays with 5-10 links next to them when you do a search for something like "restaurants"? If not, go ahead & see for yourself. Notice how all the results next to that map & even some of the regular results are coincidentally in your area? Google KNOWS what area you live in & is intentionally catering it's search results for certain phrases towards businesses that are local to your area. With that in mind, wouldn't it make sense to optimize for your local city, state, or country depending on your geographic market if you're not an international company? Afterall, if you're in the heating & air business in New York, it'd do you no good for someone in California to see you at the top of their search results! Unless you're financially prepared, don't waste money optimizing for terms that are broader than the geographic scope of your business.
Similarly, don't waste money optimizing for terms that are too vague. People will often come up with a long list of words related to their industry that they'd like to optimize for, only to find out that 2/3 of the words will do them no good. Imagine a lumber company wanting to optimize their site for the word "wood". Think of how many people out there are searching for that word... then compare that number to how many are actually looking for a lumber company. The average user might be looking for any number of wooden products/furniture, or types of wood, or doing research on trees, or even searching for the word with an entirely different meaning in mind. After considering all of these factors, go ahead & make your list of the words you think are related to your business, but filter the list in the ways I just mentioned to weed out the phrases or "keywords" that won't provide a good ROI ("Return On Investment"). When you're done, plug your list into the Google Keyword Tool to find out which terms are searched for the most. You'll then be able to prioritize which of your terms will yield the most new visitors to your site & possibly get new keyword ideas to start this process over again!
Next: Search Optimization 101 - Building Content