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SEO (Search Engine Optimization) is dealing with natural (organic, algorithmic) results in various search engines. Its main goal is to achieve high rankings in search engine result pages (SERP’s) for targeted keyword or key phrases. High positions will bring traffic to the site and possibly turn visitors into customers.

SEO is long process, you can not do seo in 5 minutes. It’s constant process, evolving with time thought analysis, changing market and competition. It takes time to establish a brand, gain inbound links, trust and targeted traffic to the website. But the outcome of seo process is long lasting, or at least should be.

SEM (Search Engine Marketing) on the other hand is a greater sphere than seo. SEM consists of SEO, paid placement (PPC) and paid inclusion.

In some cases you have to pay to be included in search engines indexes or pay for showing your ad in the ad network based on click value (Pay-Per-Click) or other method.

SEM incorporates various Internet marketing techniques which use search engines as an advertising medium.

In general:
SEM = SEO + PPC

Good understanding and differentiation between SEM and SEO might save you some embarrassment and also being educated is always a good thing. So when you talk about seo, don’t say how much you have spent on PPC campaign, as it’s part of sem.