This works because the end user who is looking for your product/service will type the city name or the state name. For example, if you are selling a house in Washingtom, your keywords should be -
buy house Washington
purchase Washington home
property Washington State
or something like that.
When you target your audience using keywords, you can even go ahead and select ALL COUNTRIES and country/language selection.
I've been doing that, but it seems to drop the volume to next to nothing. The product's widely, but not nationally available so I could do variations by area but it would be a ton of KW's all w/ minimal volume. Maybe there aren't any other options other than that. I don't want the general traffic b/c a high % of the clicks would be a waste.