Ads are more effective when shown to an audience of prospects who are more likely to be interested. For example It is a waste of resources to show ads for a one location convenience store in areas 100 miles away. When using Google AdWords, you will be penalized when your ad is ineffective.

I know you want every kind of business from everyone everywhere –
But probably you don’t have the budget for that large a campaign! Even if you did, the lack of interest from poor prospects would result in fewer impressions, and higher cost per click. With a finite budget, you should focus on the prospects most likely to buy from you. Don’t waste money on clicks from prospects too far away, or who search for products you have not been successful in selling. Save the money for the best prospects, closer in, looking for products and services you sell easily with a high closing rate.

You are “penalized” when your ad is ineffective.
When your ads don’t get many clicks compared to the number of times it is shown, Google observes that users are not finding what they are looking for with that ad. They want people to find what they are looking for with Google and that includes the ads. So they developed a quality score from 1 to 10 that along with your bid determines where (and if) you ad shows. With a high quality score of 10 you could pay .10 per click for the same ad position as a competitor with a quality score of 1 and a bid of $1.00! We don’t all pay the same! This is a major concern of professional AdWords account managers who work to protect and improve quality score.

Target by geography and scope.  It’s OK to run ads to discover new opportunities, but the “bread and butter” should be the best selling products matched with the most likely buyers. Those buyers that use keywords that are most relevant to your best selling products and services.