(Caution: Excessively long post alert ...

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As in all marketing strategies, the more you know your customer the more your efforts pay off. It also critical that you have a clear view of what exactly you are bringing to the table.
In addition to using some of the excellent tips above to evaluate your site and its competition, PPC campaign development can provide some important insight into your customer's goals and preferences and can help, in turn, improve your understanding of how and why your website is delivering as it is.
It is an excellent idea to begin with a low daily budget limit and a few ads resitricted to search-only results. Monitor the ads' performance closely, and give a little time for changes to be accurately reflected. For example, if you change a headline in a Google AdWords ad, it is important to give it a week or so without further changes in order to allow its position and cost-per-click (CPC) to stabilize. If the position and CPC are in flux, it is more difficult to analyse the ads' performance accurately.
Over time, you will learn to "read" your customers' responses to the ads; what kinds of phrases they respond to as a result of which kinds of search strings.
To transfer this knowledge over to making your website more effective, first look (as suggested above) at the landing pages that the visitor first sees after clicking on your ad. Is the message a continuation and expansion of the ad's promise? Is the transition from the search environment to your site's energy flow relatively seamless, or is it an abrupt change in tone and/or message?
The idea is to create a smooth flow that builds the trust relationship you are establishing with your customer ... from ad click through product delivery and support. If there's a kink at any point in the developing relationship's delicate thread it can have an immediate impact on that sales channel's performance.
Once you are satisfied that your learning about your customer in the search-only environment is moving along well, try adding a separate campaign using similar ads and terms (but not the same terms) and open it up to content-only. Take some time to learn about the different sort of customers you will find in that channel. Then, as you become more confident in how your changes to campaigns will affact your customer relationships, perhaps select some of the search-only ads for display on content networks, and vice versa, as you feel they would benefit from your new understanding of your market.
It's tricky to learn about one market while simultaneously attempting to learn about a distinctly different market. That is why I suggest separating your learning experience in this way. Learn what you can do to satisfy the different market needs while doing your best to provide a product that is true to your strengths.
It's a great feeling to know that you are understanding your customers, and to have ideas you can implement on your site that really do make a positive difference as a result.
Jay: Great book reference. It's fascinating.