First you target a phrase to get a rank in. If you sell blinds in Charlotte, North Carolina, they you want to target "Charlotte blinds" in the search engines. And you want to come up with other search phrases that your potential clients will use when looking for your goods and services.
Search engines use very complicated formulas, called algorithms, to determine where websites are ranked
Initially you target phrases that you think will bring you the type of traffic you want. Then you see how much other sites are competing for those phrases.