Keyword proximity refers to the closeness of keywords, i.e. how close the keywords are to each other in the content of webpage.
For eg. consider:
Website 1 content : "Ayurvedic medicines, herbal products,..."
Website 2 content : "Ayurvedic, Allopathic, Homeopathic medicines, ..."
Here if your keywords are Ayurvedic,medicines and when someone searches for it, website 1 has more chance of being listed because it contains those keywords closer.
Feb 21, 2015