We investigate the physical cause of the great range in the ionization level seen in the spectra of narrow lined active galactic nuclei (AGN). Mean field independent component analysis identifies examples of individual SDSS galaxies whose spectra are not dominated by emission due to star formation (SF), which we designate as AGN. We assembled high S/N ratio composite spectra of a sequence of these AGN defined by the ionization level of their narrow-line regions (NLR), extending down to very low-ionization cases. We used a local optimally emitting cloud (LOC) model to fit emission-line ratios in this AGN sequence. These included the weak lines that can be measured only in the co-added spectra, providing consistency checks on strong line diagnostics. After integrating over a wide range of radii and densities our models indicate that the radial extent of the NLR is the major parameter in determining the position of high to moderate ionization AGN along our sequence, providing a physical interpretation for their systematic variation. Higher ionization AGN contain optimally emitting clouds that are more concentrated towards the central continuum source than in lower ionization AGN. Our LOC models indicate that for the objects that lie on our AGN sequence, the ionizing luminosity is anticorrelated with the NLR ionization level, and hence anticorrelated with the radial concentration and physical extent of the NLR. A possible interpretation that deserves further exploration is that the ionization sequence might be an age sequence where low ionization objects are older and have systematically cleared out their central regions by radiation pressure. We consider that our AGN sequence instead represents a mixing curve of SF and AGN spectra, but argue that while many galaxies do have this type of composite spectra, our AGN sequence appears to be a special set of objects with negligible SF excitation.