Once you measure the popularity and difficulty of your keywords, you can make a visual aide to help in deciding which keywords to optimize for. This aide is called a keyword effectiveness index.
To construct a keyword effectiveness index you simply need to plot a chart with search volume on the x-axis and either Google PR of the first site, or total results returned, or another measure of perceived keyword difficulty on the y-axis. The x-axis represents benefit and the y-axis represents inherent difficulty to achieve the top spot. You want to optimize for words with low difficult and high benefit. Otherwise known as the path of least resistance.
The idea is to find a keyword that will result in a point that is as red as possible. You of course though know your own limitations, if you have the skills and resources necessary to take on an extremely difficult keyword, then by all means go for it. This tool is merely meant to help you in your keyword research, in the end though it can only provide guidance, it cannot make your decisions for you.
I cannot express how important it is to conduct proper keyword research. I had to learn the hard way and I missed out on some serious income because I didn't know any better. You luckily have this article and this site and hopefully you will learn from my mistakes and do keyword research from the start.
Once you've thoroughly researched your keywords, you can start learning how to effectively use them on your site.
As always, if you have questions on anything in this article or need help you can visit our webmaster forums.