Hello AWCthreads,
Thanks for coming to Q&A with your question. I'm the Local SEO Associate here in the forum and want to applaud the good response Nicholas has given you.
You have explained that your venture is an e-commerce site. Does this mean that the business is virtual (no person-to-person contact either at your office or at the homes/businesses of clients?). This is a critical point of information, because having a real physical location in your city/state puts you in a very different category than if you conduct all business virtually.
If you are doing business virtually, then, yes, I would say that heavily optimizing your website for your city/state is sending a strong signal to the bots that you hope to be viewed as especially relevant for 'blue widgets city state' as opposed to just 'blue widgets'. Is there a good reason for you to want to appear as most relevant locally? Does the thing you sell apply most to local people or is it a product used nationally? My question is a little vague because I lack information about what the product actually is.
Now, if the business is NOT virtual, and you have taken steps to optimize your website for it's local geographic terms, and have also gotten the business profiled in Google Places and other local business indexes, then Google is naturally going to view the business as most relevant for local searches. It is possible to run local and national SEO campaigns simultaneously, but different strategies will depend on the business model.
So, I would like to close with my question for you regarding whether there was some reason you heavily optimized your site for a local audience. What is the reason for/thinking behind this. Clarification on this point would be really help!
Miriam