Search engines like to see you add content to your Web site on a regular basis. Search engines like to see the content themes you create when you blog against assigned categories. Search engines love when you promote this content through social media marketing and you get new visitors and links from these efforts.
Once you know you want to begin blogging, where to start? You can discuss platform (I love WordPress and the many plug-ins available) and set-up (you should always have a permalink structure, and title your posts with some use of the keywords which are important to you), but what about where the blog resides?
Should you use a subdomain, subdirectory, or a completely separate domain?
The answer is another question: "What are you trying to achieve?"
Many of my company's clients need to add content to the root of their domain to build up the authority necessary to compete for keywords. So, more often than not, we recommend that our clients add their blog to a subdirectory.
This would look something like www.example.com/blog. Then, when they add a post, the permalink structure would look something like www.example.com/blog/name-of-post-here/ or some have forgone the /blog for the individual posts and had www.example.com/name-of-post-here/.
Adding the blog to the subdirectory shows the search engines that you regularly add fresh content to the root of the Web site, and you can feed (via RSS) the most recent posts to the home page and then promote this content through StumbleUpon, Digg, Mixx, Propeller, etc., and get folks to link (deep link) to the content, so long as you created linkable (i.e., quality) content.
Your goals may be different, however. If you already lead the pack in your competitive set, in terms of pages indexed, and you add fresh content to your Web site through other means, and you're solely interested in developing links, you may want to consider one of the other two alternatives.
While less than ideal (I prefer to have the blog reside in a subdirectory), there are reasons why you would opt to put your blog on a subdomain (e.g., http://blog.example.com), and most of those reasons involve technical issues, usually involving the Web server. For example, technically speaking it may not be possible to add a blog using WordPress (my preferred blog platform) to certain Web servers, as WordPress requires that PHP be installed, and some IT managers just don't want to support PHP on a Windows server if it isn't already being used.
Using a subdomain for the blog would allow you to set up separate Web hosting for that subdomain, allowing the blog to be hosted in a different location (or using a different Web host) than what's being used to host the main domain. When you can't install WordPress (or Movable Type) on the main domain's Web server, setting it up on a subdomain can be an option: set up hosting with a separate Web host or go directly through WordPress or Movable Type.
With this, any linking that you might do (deep linking) would be seen as coming from a separate "site," even though it's obviously attached to the root site, by virtue of the subdomain. So, the links may not be as valued as if these were coming from a completely unique Web site/separate domain. But, because this blog resides off the same domain, you will gain the benefit of being the "thought leader" that you're building the blog to represent, and will have the association, if that's important to you.
The final reason why you might select a subdomain, rather than a separate domain, is that you get to "piggy back" off of the value of the root domain (age of domain, etc.), and get the sub-domain blog to gain authority rather quickly.
Perhaps you want to have a voice that is "unbiased" and create a separate entity/blog that has its own brand and identity and is seen as not tied to any commercial entity. Perhaps you want to host this somewhere completely separate from where you host your corporate Web site, so that the search engines see no relation to a corporate entity, too.
Obviously, if you're clever, you can create a blog that is seen as just liking one Web site so much that it links to it pretty often (and manage to use just the right mix of keywords in the anchor text to those links), as to help select pages of this other "non-related commercial Web site" rank well for keywords of choice. This can be an effective strategy, but keep in mind this blog will need all of the love and attention that any SEO project would get.
You would need to be concerned about the age of the domain and links pointing to the domain (so that the links that you might direct towards your commercial Web site have any amount of "juice"). A separate domain will be a lot more work in the long run, but can be effective.
What are your thoughts and experiences?
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