SEO (or Search Engine Optimization) is the PROCESS of improving the ranking of a website in the Internet Search Engines. Essentially, how relevant is your website to the search query that the user typed into the search box.
The search engines are constantly collecting information about every page on the web to help people find what they are searching. They use “spiders” and massive algorithms to index all this information. The “spiders” read your site looking for particular information that will indicate what your website is related to. The more relevant your site to what people are searching, the higher your site will appear in the search results, thus the more likely you are to have people find your site.
This is why it is vital to have proper SEO, so search engines index your site and display it to the people searching for your business. Proper SEO ensures your business has the greatest chance of showing up on the first page of the search engines.
Matt Cutts of Google explains how Google indexes the web:
John Shaw
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