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16 times out of 490 words is a 3.2% density, which is right where you want to be. You could actually use it more times. a 3-7% density is good. Also, make sure you have this target keyword synergized in your title, description, and Hs. I would suggest the change in ranking is a temporary dip, since you changed the copy of the page. Think of your rankings like a stock market. Even the best stocks go up and down. Now that you have entirely new copy, Google is now reorganizing your content in it's index. Should be back up, if not better, soon. Personally, I see pages with 1500+ words rank well. But then the challenge is user interface and design to allow an easy read.

I would improve the main domain.  Building a subdomain will divide your power. We redirected all of our subdomains into folders a few years ago and the results have been kickass.