I would guess that there are better ways of monetizing a specific zip code, but they would involve walking the streets in each zip code to find businesses that want to advertise.

There are some travel related and job search affiliate programs that I've seen which use zip codes, they might work to a degree. I still can't imagine any other product working on a large number of zip code targeted pages besides AdSense.

It sounds like you recommend AdSense then - but is there some way I could ensure that AdSense harnesses the highly local nature of my site - for example, by explicitly telling Google, "here is the zip code", or by putting the zip and city in bold and H1 at the top of the page?

The only way I know of is to use the geo coordinates in an ICBM tag. Most zip code databases also contain geo coordinates.

Suppose I own a site where every page's content is about topics specific to a known a zip code.

If I were you, I'd go over to the AdWords board and ask how many advertisers try to target a particular zip code, as opposed to an entire city, for example. That might give you some idea to start with.

Also, I think your success will depend on whether your page(s) on each zip code have quality information as if it was hand-built as opposed to some type of computer-generated pages/directory, etc. Those automated pages are usually just plain awful.

FarmBoy

Let me clarify: The data is indeed hand-compiled (no scraping or automation). While it is most useful to users in the immediate vicinity, after a 10 mile radius the data's value approaches zero value. Users are entering their zip code, but it seems AdSense might not best take advantage of this.