To answer your question Green, there really is no right answer to that. All we can do is to take our magic seriously, more than just the effects, but in all aspects of performance and make our decisions from that. It's all situation dependant, honestly. Maybe you do have time to try to get to know someone a little more before you hit them with the magic. In that case, if you are looking for maximum reaction, that might be the way to go. In other cases, you might not have that kind of time, like if you are a restaurant worker. Then, you have to use your instincts as a performer, your common sense, and your knowledge that you've developed as a magician and make an informed decision.
However, to gain that knowledge and make informed decisions I think the magician has to take their magic seriously, and seriously study the performance side of magic. I majored in Communications and Business in college, as well as took all the sociology, and psychology electives I could, just so that it would help me in my performances. Now that may be an extreme example (if you're in college, not too extreme, as you have to take extra elective fluff classes anway...so you might as well make them count toward something useful), but the point is to really take a hard look at performing, and try to expand your horizons and really study why people act, say, and do the things they do. And capitalize on those things in performance.
Study might be as simple as jotting down notes about reactions of people, your performance style, etc while at your restaurant gig or private party (or right after your show). Keeping a magic journal can really give insights into your performance style, and help you to develop it further. Even simpler is just really taking notice of people as you perform, or even when not performing (like when your just talking to a group of people or whatever). REALLY taking notice means your being conscious of yourself and others, and that will help you to develop.
As far as in performance tips, sometimes even just bringing up the conversation in performance can help you get tells from people. Asking the spectator, "hey, what do you do for a living." If he/she tells you they are an accountant, you could theoretically ask them how they feel about it: "Oh really, accountant...math for a living...may god have mercy on your soul!" (Of course said jokingly). Then take note of their reaction to your statement, and base your performance around that. You could even say "Really...accounting...wow I'm impressed. How on earth do you survive?!?!" A statement like that is for sure going to give you the tells you're looking for.
Also, keep in mind, that as much as you're right about really making that connection with your audience, don't go to that other extreme and think that's all there is to it. In my experience, especially these days, the selling of yourself is vital to your magic and the reactions to the magic. What I mean is that, in some way, you have to figure out how to get buy-in from the people you are performing for. You have to tailor not only the effect, but the delivery and also yourself to obtain maximum reaction. You can find that connection with your spectator and tailor the effect for them perfectly, but if they think your an idiot, a nerd, condescending, weak, intimidating, unfriendly, bashful or whatever...you're still not going to achieve maximum impact. Basically, if your taking your magic seriously, there really is a lot to think about and work on to get your magic to that level you seek.
Just my two and a half cents worth.