(Disclaimer: I'm trying to learn this stuff so everything that you read here might be wrong for a while. If I were you I would sit on my hands and not change anything until I see my views improve. I'm focusing on major search engines and when I think I'm done I'll go back and try to fit it into Etsy's policies. Seeing as they change their mind constantly I'm going to leave them for last.)
The science of hunting for keywords is pretty easy. All you need to do is go to the Google Adwords Keyword Tool and start entering words and short descriptive phrases to see what the competition is and how many searches are performed on it each month. The idea is to select the ones that seem the best to you and then you can star and download them to an Excel spreadsheet.
The art of it is not that easy for me. The idea is to aim for a targeted audience that might buy your item and conventional wisdom says that people use longer and more specific phrases once they are ready to purchase something. If the competition for the keyword is high and it's frequently searched on then you'll probably be buried in huge numbers of results and if the competition and monthly searches are low you might not get a huge number of views but the ones that you get are truly interested in your items and not just window shopping or lost on the internet.
Some keywords are good to describe individual items and some are more relevant to my shop as a whole and those are the ones that I'm starting with first. I'm also going to forget about the hats and blankets for this first pass. These keywords will end up being used in my shop title, shop announcement and section names and should create a theme for my shop. I've spent hours over the last 2 days playing with keywords like fashion, couture, plus size, sweaters, clothing, etc. but they are such common terms that they all have high competition and lots of searches. I started out with a theory that I should find things with a competition less than .5 but so far I haven't even come up with one. You can easily see which keywords are getting people into your shop on Etsy simply by looking at your shop stats and the keywords used for my items are more targeted (for example "Mohair Sweater" or "Plus Size Cardigan"). I'm not sure where to go from here in terms of coming up with more targeted keywords for my shop as a whole but I'm not giving up. I'm going to google around for a few more ideas and then settle on a few key phrases that I feel describe my shop well and make it easier for the people interested in high-end sweaters to find me.
Please come see my handmade designer plus size sweaters, sweater coats, capes and shrugs at MirabilisFashions.com
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