Does Domain Name Matter with Geo Targeting?

In my own experience Domain Names do not matter.

I would not use keyword-rich domains, but your subfolder idea would certainly be beneficial.

I would worry more about the user experience on your landing page (was the ad congruent with your landing page) than the name of the domain.

I have used keyword rich domains such as plumbersimsbury.com and it definately works to some degree.
What you really need to do is stack the odds in your favor by using as many of Googles ranking factors as possible. Both on and off page.
Ex:
Keyword rich domain and sub domains
key words in the following:
title tags
alt tags
keyword density
keyword positioning with in your copy (especially in the first few words and the last few.)
use of underline/bold/italic of those keywords
H1, H2, ... tags with the keywords
Create a Google + page and link with their Goolge Places page.
You should also have your address and phone number on all pages in a hcard format

You should have a well written meta tag that speaks to the customers pain. (If you do not click on you none of this matters!)
Once they get to your page it should look professional with a strong call to action. The word "Free" is still one of the best words to use. Offer a coupon, Please give them a reason to pick up the phone and call!
It is amazing if you just use some of the things I mentioned and focus on a local search term you will rank on page one with out much else.
Of course you still need to create a site map and all of the other good stuff. I just amazes me how many sites rank on page one and have almost none of this!
I just made a brand new site 30 days ago following the above and it ranks postion 2 one page one organically and postion A on the 7 Pack for "pressure washing + town", "power washing + town", "town pressure washing"...

Keep in mind I have no experience in your question particularly when saying this, but just knowing their manual review process, a GEO-targeted domain will probably look a lot more spammy than a subfolder. Having a fully built website behind the domain you use definitely makes you less likely to run into issues in my experience.

I would also ask this question over in the SEO section of the forum. You are looking for Local Search and this is an excellent niche focus and you need to go deeper than domain name to get there.

tarpontim1138 said it well. I totally agree with what he listed. If you look at the latest information on how Google does its rankings, domain name is becoming less important as other factors mentioned.

If you are relying on local search rankings I would focus on solid content and cover what was mentioned in how you setup your pages and images.

Thanks for the great input everyone.

I always strive to create relevant, quality content, and certainly not looking to game the system. However, I also want to use every tool at my disposable, the domain name being one of them. I was just concerned with over doing it.

I would recommend you use domain for branding purpose and use keyword in subfolder for geo-targeted.

It depends on how big of a geo market you are going for.
If you are looking to dominate narragansett ri only as a plumber you could create www.narragansettplumber.com (if it was available) and do proper on page seo and within a few months be on top of page one. I have done this many times, it works. If you are looking for a larger geo area a branded page with sub pages with the towns would work better. But if all you are looking foris a one town domination, try adding it in your domain. If you didmnot have your town in your domain you still soulf be ale to dominate if you follow seo best practices. I just found it much easier with the town in the domain.