Think about a consumer surfing your online store from a location that's much closer to one of your competitor's physical stores than to one of your own. An added incentive display to this consumer could close the sale — perhaps a “this visit only” discount or a good deal on shipping.
If it works, this strategy wins you more than a sale: it lands you a new customer while stealing market share from the competition. And speaking of shipping, think about the money you could save by adjusting shipping offers relative to customer location (e.g., faster shipping at lower cost to customers near your warehouses).
Still skeptical? I can honestly say that I've seen this strategy work, and work very well. But the answer you really need is the one that your analytics will give you when you test this type of campaign on your website.
In practical terms, you can develop geo-targeting capabilities in-house, using data from specialist companies like Quova, MaxMind or IP2Location. Or you can tap geo-targeting resources in such on-site marketing packages as Sitebrand's Segment&Serve, Omniture's Test&Target or Monetate's Real-time Marketer. But whichever path you take, there's a good chance it'll deliver excellent return on investment, not to mention teach you a lot about your customers.