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If you need to use a city / location in your keyword phrase, then simply find the top phrases people are using in search engines, regardless of # of competitors, and use the phrase plus your city/location.
Especially since I am targeting smallish cities in my area. I would use the top two tools: Overture and Google Suggest.
E.g.: If you are providing web design services: Basically use the roots: web, web site and website and find the most popular phrases that mean what I provide and use the popular phrases on your web page. (2 phrases per page max)
web site design
And use a header and footer on every page like: "'Servicing City1 and
And the location in the "About-Us.shtml" page.
Also the same sentence in the about-us.shtml page.
I heard that I then wouldn't have to worry about sticking the city keyword as part of every keyword phrase and making it so awkward to read.