First, an explanation of KEI from WordTracker, for those who are not familiar with the term:
KEYWORD EFFECTIVENESS INDEX (KEI)
The KEI is a measure of how effective a keyword is for your web site. The derivation of the formula for KEI is based on three axioms:
1) The KEI for a keyword should increase if its popularity increases. Popularity is defined as the number present in the "Count" column of WordTracker. This axiom is self-explanatory.
2) The KEI for a keyword should decrease if it becomes more competitive. Competitiveness is defined as the number of sites which a search engine e.g. AltaVista displays when you search for that keyword using exact match search.
Exact match search means that a search engine searches for only those sites which use the keyword exactly as typed in by the user. It is the equivalent of entering:
Partial match search means that a search engine also searches for sites which contain the individual words of the keyword but not necessarily occurring together or in the order typed in by the user. It is the equivalent of entering:
Partial match search presents a distorted picture of the competitiveness of a keyword because when you optimize your site for a particular keyword, you are actually competing with sites which have used the keyword exactly as typed in by the user.
So to clarify, competitiveness is defined as the number of sites which a search engine displays when you search for that keyword using exact match search, that is with quotes surrounding the term. Rather than those web sites returned when entering the phrase only partially, that is without quotes.
Note: When you select KEI Analysis, quotes will be added temporarily to each of your search terms for the purposes of the search.
3) If a keyword becomes more popular and more competitive at the same time such that the ratio between its popularity and competitiveness remains the same, its KEI should increase. The rationale behind this axiom requires a more detailed explanation. The best way to do this is to take an example:
Suppose the popularity of a keyword is 4 and AltaVista displays 100 sites for that keyword. Then the ratio between popularity and competitiveness for that keyword is 4/100 = 0.04.
Suppose that both the popularity and the competitiveness of the keyword increases. Assume that the popularity increases to 40 and AltaVista now displays 1000 sites for that keyword. Then the ratio between popularity and competitiveness for that keyword is 40/1000 = 0.04.
Hence, the keyword has the same ratio between popularity and competitiveness as before. However, as is obvious, the keyword would be far more attractive in the second case. If the popularity is only 4, there's hardly any point in spending time trying to optimize your site for it even though you have a bigger chance of ending up in the top 30 since there are only 100 sites which are competing for a top 30 position. Each hit is no doubt important, but from a cost-benefit angle, the keyword is hardly a good choice. However, when the popularity increases to 40, the keyword becomes more attractive even though its competitiveness increases. Although it is now that much more difficult to get a top 30 ranking, spending time in trying to do so is worthwhile from the cost benefit viewpoint.
A good KEI must satisfy all the 3 axioms. Let P denote the popularity of the keyword and C the competitiveness.
The formula that we have chosen is KEI = (P^2/C), i.e. KEI is the square of the popularity of the keyword and divided by its competitiveness. This formula satisfies all the 3 axioms:
i) If P increases, P^2 increases and hence KEI increases. Hence, Axiom 1 is satisfied.
ii) If C increases, KEI decreases and hence, Axiom 2 is satisfied.
iii) If P and C both increase such that P/C is the same as before, KEI increases since KEI can be written as
KEI = (P^2/C) = (P/C * P). Since P/C remains the same, and P increases, KEI must increase. Hence, Axiom 3 is satisfied.
Note that the formula for KEI is not unique. In fact, this is one of the nice things about the KEI. If, instead of using 2, you use any power of P greater than 1, the resultant formula will also satisfy the 3 axioms. For example, (P^1.5/C) and (P^3/C) both satisfy the 3 axioms. The exact power of P that you choose depends on how much emphasis you want to give to the popularity of a keyword viz-a-viz its competitiveness. Higher the power of P in the formula, higher will be the emphasis on popularity. If you are very confident about your search engine positioning skills, choose a higher value for the power of P. If you are not that confident about your search engine positioning skills, choose a lower value for the power of P (but the power should still be more than 1). Thus, the KEI can be adapted to your skill level! Feeling confused as to which power you should choose? Stick to 2. It maintains a nice balance between both popularity and competitiveness.
Please note that Wordtracker defaults to 2 (P^2/C) as described above.
I would say that KEI is useful because it is the only high volume way to gauge keyword difficulty.
A much better way to gauge keyword difficulty is to examine the top ten competitors for that keyword. Many people use SEO for Firefox to help with this process.
But, that takes a lot of time and effort for each keyword. I'll do that if I'm looking to invest heavily into a keyword. For most keywords I chase, it's easier to build and post an article than it is to do meaningful manual keyword analysis.
KEI is useful to me because it lets me gauge "rough" competition levels of hundreds of keywords at a time. It's certainly not perfect, but it's better than nothing.