The proximity search uses just the first part of your postcode, and works out the location to be approximately in the centre of the postcode map that this matches. In a big city that's probably accurate to within a mile or two, but out in the sticks it could be a much larger error.
For instance, the AW location for my postcode is about 4 miles from where I actually live, and for one of my regulars its 2 miles from her actual location. AW tells me she's 13 miles away, but in reality its 9.
They can be useful, but are only as accurate as the cemtre of postcode maps they are based on.