1. Use a proper tool.
Sure, there's a lot of free stuff available out there, but when it comes to keyword research free tools are few and far from powerful. If you're considering investing either money or time into SEO for your web site look at a solid keyword research tool as a necessity.
Some of the better keyword research tools:
a. SEOmoz's Keyword Difficulty Tool - this tool from one of the great SEO innovators gives you a good general idea of how competitive your keyword/phrase is.
b. Trellian's Keyword Discovery Tool - user-friendly, simple, and feature-rich. One of the best keyword research tools available.
c. WordTracker Keywords - second to none, WordTracker has been a leader in keyword research for years. A great value.
2. Identify *viable* targets.
We'd all love to rank well for the most general and all-encompassing search phrase related to our topic, but only a handful ever will. Targeting some ultra-competitive keywords is as good as shooting yourself in the foot unless you've got massive amounts of time and resources to throw at the problem.
Finding long-tail (three words and more) and targeted search phrases that are actually getting traffic can mean the difference between SEO success and failure. Be reasonable in your expectations, and fight the big guys by researching long-tail search phrases that have slipped beneath the radar. You might also find that long-tail search phrases bring better conversion rates for your topic.
3. Keep it relevant.
You may find keywords and phrases that offer inroads to high search rankings, but it's important to remember that the ultimate end is traffic and how you utilize it. In other words, you need to be sure your keywords relate to your web site. If you get a page to rank well enough to bring in some search traffic, but when users actually view that page they either can't make sense of the content or find the page unrelated to your topic (or worse - spammy) that search traffic will do you no good. Not only will off-topic or spammy content affect your brand and drive users from your site, but there's a chance Google could catch on to your irrelevant content or spammy techniques and penalize your domain for it.
4. Don't be too wordy.
No, really. A common mistake is to choose your keywords based on your own perspective rather than that of your target users. Sure, you know your topic inside and out. You know the buzz words, the technical details and a whole lot more, but do your users? What if the user isn't sure what they're looking for? Maybe they know the function but not the name. Keep this in mind when researching keywords, and make sure you consider your choices from the perspective of someone very new to your topic.
5. Consider local search.
One area small to mid-sized web sites can really find a competitive edge is in locally-specific search phrases. These are inherently less competitive and therefore are easier to rank well for. However, go back to #3 and think it through - if your web site is locally specific or if users will want to know your location this is a good strategy, but optimizing pages for local keywords that will look out of place to users can be a mistake.
6. Monitor your web analytics.
One of the great benefits of web analytics is that it allows you to monitor keyword referrals. In other words, you can find out what visitors are searching for when they land at your site. For brand new sites there won't be too much data, but if your site has been around at all and is getting some organic search traffic you will find that your analytics reports are a great source of keyword information. Referring search phrases can be surprising - sometimes including misspellings and other abnormalities. Keep an eye on your analytics, and you might find a keyword worth optimizing for.
7. Constantly reevaluate your position.
While keyword research is definitely the first step in developing your site content from an SEO standpoint it should also be a recurring one. Internet trends shift quickly. While a lot of your core keywords will remain unchanged for the foreseeable future some buzz words will get attention while others fall from the spotlight. Stay on top of your keyword research and you can make the most of new opportunities while recognizing the less-than-ideal keywords that are either too competitive or don't bring in enough traffic.