The answer is, both.
Paid search and search engine optimization (SEO) are complimentary, not conflicting, forms of search engine marketing. Here are a few points of distinction.
1. SEO is a long-term proposition. It takes time for a site's keyword optimization and other SEO features to begin lifting a site's position on the search engines. Paid search campaigns, conversely, have immediate impact. A site launched yesterday can attract traffic today with pay-per-click (PPC) advertising.
2. The long-term advantages of SEO, however, can hardly be overstated. Many consumers are more likely to click on a highly ranked site than one that appears as a sponsored ad. High search engine rankings give a site credibility. Site credibility can matter even when a consumer clicks-through on a PPC ad. The consumer may be skeptical of placing an order if the seller is nowhere to be found on Google.
3. Paid search has maximum impact when consumers are in the market now. SEO carries more weight for consumers who will be in the market later. For example, a couple planning to put their house on the market in six months will spend quite a bit of time looking for a realtor. If they are like most people, they'll start by looking at the top 10 or 15 realtor sites on a Google search--not by clicking on the biggest ad.
To keep the lines of communication open with immediate and long-term prospects, balancing paid search and SEO is essential.