When you use Google's tool to select keywords for your site, you will most likely come up with dozens of words or phrases that either 1) don't generate enough meaningful traffic or 2) are too competitive (and therefore too difficult) to carve a niche out of.
There are different ways to handle each situation. Let's tackle the first scenario: your keywords don't generate enough traffic. You will know this is the case when Google responds to your query with "Not enough data" under the Search Volume columns.
The easy way to handle this situation is to think of other, more appropriate keywords that will yield more traffic. Consider the phrase "private home tutor" as an example. That phrase doesn't register on the Google keyword tool and it only generated about 400 hits during the last month on record. However, the key phrase "home tutor" gets over 18,000 queries a month. Simply taking the word "private" out of your key phrase should significantly increase traffic. For those of you thinking, "yeah, it gets a lot more hits, but it is way more competitive", just hold that thought. I'll get to ranking the keywords and phrases in the next section. For now, just understand that some keywords and phrases that will generate more traffic than others. You usually want to use the ones that generate the largest amount of traffic.
However, not all companies (especially service businesses) should think of more "appropriate" words that will yield more traffic. What they need to do is simply add the name of their state, city, or even suburb to the end of the high traffic keywords. This is called the "long tail" component of your SEO - even if the entire key phrase does not register on Google's keyword tool. Let me explain.
Most people search for service businesses by location. My best clients use high traffic keywords and phrases but add a tail component to the keywords. For example, a painter in Louisville, CO wouldn't just optimize his website for "painters", "paint", or "house painting". He would optimize his site for "painters in Louisville, CO", "paint in Louisville, CO", and "house painting in Louisville, CO" etc. Those entire key phrases do not generate enough traffic to show on the Google keyword tool, but they do generate enough traffic to sustain a local painting business in Louisville, CO. In this situation, the keyword tool should be used to select high-ranking traffic words along with a tail component that includes the business's location.
Now take a look at the second scenario: the keywords are too competitive to carve a niche out of. I want to emphasize that this rarely happens for local service businesses. There are twenty listing on the first page of Google (ten on the map and ten in the organic listings) and there are rarely twenty local service businesses working hard to maximize their SEO efforts. That said, there is still a chance that some of you will end up in this situation. Like the previous scenario, there are two solutions to this problem as well.
The first solution to a crowded keyword environment is to get specific about your target market. For example, I only work with service business owners. I won't even consider building websites and implementing SEO for a product-oriented business. It's a time intensive, highly complex, time consuming headache of a task. Can I do it? Yes. Do I want to spend fifty hours a week doing it? No. So two of my keywords are "Service Business". Makes sense, right?
Now it's your turn. Think of whom specifically you serve. I work with an association that serves only independent music teachers. I have another client that works with only chiropractors. Is there a unique group of people that you serve - senior citizens, painters, teachers, churches or lawyers? If so, use that target group and add it as the "tail" at the end of your key phrase (ex. SEO for service businesses).
The second solution to a crowded keyword environment is to get creative with your keywords. Are people looking for a "WordPress Wizard" or "Bookkeeping Expert"? If so, those creative words and phrases are often less competitive and can help bring eyes to your business. Just make sure the creative phrase you use generates more than a couple thousand searches a month. You don't want to get so "creative" that your SEO doesn't actually work.