It provides a 3 tier rating of potential - blue (high potential), black (average), red (low).
I have never heard exactly how the cost is determined, but yes - it's based on # recruits in the state - so the larger states cost more (i.e. NY, Texas, California, etc). This is probably obvious, but you can tell how much it costs before you buy the state.
There is a discount on price when you buy in bulk (10%, 15% and 20% ultimately).
The "word on the streets" (commonly abbreviated to WOTS) message can also be helpful in determining who has the lead on a player. This can be helpful in situations where a coach is considering a battle with another school and wants a sense as to whether or not they are in a back and forth battle with a different player (thus spending lots of their recruiting budget on that battle, giving you an opportunity in your potential battle to be).
It is absolutely essential to purchase FSS to have a good team.