On-Site optimization refers to attributes which exist within the code (HTML, PHP, etc) and file structure (Image docs, Text docs, Sub-Domains) of your website. For example, including keywords in your metadata would be an example of “on-site optimization.” Keyword stuffing to achieve an ideal keyword density, say around 5%, would be another example.

Off-Site optimization on the other hand refers to both the links coming into your website (backlinks) and the attributes of the websites sending you those links. For example off-site factors which may be taken into consideration are not only the number of backlinks but also the source of those backlinks.

For example, how many of the backlinks come from related website and how many come from unrelated websites. Keep in mind that relevancy may be largely determined by keyword density (both of your site and the refering site). In addition to the source of backlinks the speed at which backlinks are created may be a factor in the algorithm’s ranking schemes. For instance a large glut of backlinks created in a short period of time may be viewed as a sign of manipulation by the algorithms.

In the early days of Search Engines, on-site optimization used to be the factor of primary importance. But then SEO experts figured out how to adjust on-site factors to manipulate the way that their websites were perceived and ranked by the algorithms. As more people figured out and applied the tricks the search engine queries became more and more skewed. This shift towards less “natural” or “true” results forced the algorithms to adapt by changing the way they weighed factors.

The next generation of algorithms favored off-site factors, specifically the backlink in a big way. The algorithms of that era seemed to view each backlink as a “vote” for that website. During this time period it appears that little distinction was made between types of backlinks. The idea seems to have been, the more backlinks, the better. So SEO experts of the era became masters of the “Google Bomb”, a technique where by optimizers would create as many backlinks to their sites as possible I over a short period of time.

Once again the Algorithms were forced to adapt in their desire to produce more “natural” search results for their users.

Some attributes that used to be of supreme importance such as metadata now seem to be of little importance. For instance I do not consider adjusting metadata of my sites at all, aside from possibly using the “noindex” and “nofollow” commands if I want the search engines to overlook a particular page on my site.

So the algorithms and SEO experts are locked into this perpetual dance where by one is constantly trying to stay a step ahead of the other, each to benefit there own interests and the interests of their clients or users.