Every computer is tied to an IP address that indicates its specific location. The first three digits of an IP address corresponds to a country code, while the succeeding digits often refer to specific areas within that domain. This geographical information, when used for marketing purposes, is called geo-targeting.
Geo-targeting aims to improve the cost-effectiveness of marketing programs. For example, if the product is a plane ticket from Honolulu to Vancouver, then it will more likely sell to someone who is located in either of the two cities. If a visitor is in a different city, then a different set of offers may be given.
The system is not 100 percent accurate. Inaccuracies happen when web surfers use proxy servers or some other IP-masking tool, among other methods. However, these instances are rare enough for geo-targeting to still be effective. Geo-targeting is available to even small advertisers via outlets such as Google Adwords.
Practical application: geo-targeting is critical for professional service firms-- dentists, doctors, attorneys, and the like. Some folks are more local than others-- for example, the local dry cleaner is not going to attract people from 3 states away (much less, across town) while an east coast realtor may attract folks who are searching from California for real estate. A Las Vegas hotel may attract booking nationwide, as would a world-famous restaurant.