What lies beneath: today's consumers no longer fit into yesterday's molds. Here's how to get a grip on the new demographics—and get inside your customers' heads

Entrepreneur, May, 2005 by Chris Penttila

Age, income, sex and educational level. For decades, companies large and small have depended on these demographic categories to shape their marketing campaigns and make sense of their potential customers.

It might be time to rethink this strategy. Demographics-the quantifiable social and economic characteristics of a population--aren't as powerful as they used to be. "The value of demographics has begun to wear out a little bit. They're increasingly becoming less important," says J. Walker Smith, author of Coming to Concurrence: Addressable Attitudes and the New Model for Marketing Productivity and president of Yankelovich Partners, a market research and consulting firm in Chapel Hill, North Carolina.

Why are demographics not as significant as they used to be? As U.S. society evolves, subgroups are emerging within traditional demographic groups. Take, for example, the rise of mixed-race, or multiethnic, individuals. Today, 1 in 16 Americans under 18 is of mixed racial heritage, and celebrity examples abound, from Tiger Woods to Halle Berry to New York Yankees' shortstop Derek Jeter.

Also consider the shifts taking place between married vs. single households, a major component of traditional demographics. In the 1950s, 80 percent of U.S. households were married households. Today, the figure is only slightly more than 50 percent. When Yankelovich studied 170 variables ranging from spirituality to brands, it found much greater diversity of attitudes among single people compared to married couples. In other words, just knowing that someone's single these days doesn't tell you much about what he or she really thinks and believes.

Adding to the difficulty of categorizing consumers is their refusal to be stereotyped on the basis of race, age, education and income level. Americans living in a more accepting, multicultural society no longer fit neatly into one demographic profile that lets companies determine their lifestyles and the best way to market to them. "Some of the demographic categories we've traditionally understood are now breaking down," Smith says. "The boundaries between categories are blurring."

Goodbye Mass Market, Hello Nanomarket

In his book, Smith writes that increasing diversity has transformed the mass market into what he calls the "nanomarket," an explosive growth in consumer segments, preferences, tastes and lifestyles that's fragmenting the marketplace into tiny pieces beyond the measuring ability of traditional demographics. The word demographics isn't out of vogue, but its connotations are dated. According to Smith, "The term implies an old-fashioned way of thinking about the marketplace."

Demographics alone no longer work in a mass market that's more or less dead, says Robbie Blinkoff, principal anthropologist and managing partner of Context-Based Research Group, an ethnographic market research firm in Baltimore. "It's an individualized, customized, personalized marketplace," he says. "It is now the producers-companies, manufacturers, marketers and retailers--who need to adapt."

Many companies, however, continue to operate on old beliefs based on demographic data, and it's leading to a disconnect between companies and consumers. Many advertisements, for example, continue to portray women as married, stay-at-home moms in a world where an increasing number of women stay single into their 40s, become single moms by choice and take on primary-breadwinner roles within their families.

Amid such shifts, simply saying your company targets women 18 to 49 has become meaningless. Demographics "don't tell you the whole story," says Jennifer Ganshirt, co-founder and head of strategic planning of Frank About Women, a Winston-Salem, North Carolina, marketing and communications company that studies the female consumer. "Companies know [targeting the 18-to-49 demographic] isn't working for them. It gives them nothing."

Sensing a problem, big companies are going deeper into consumers' heads to understand what drives them to buy--and this, in turn, is driving market research methods such as ethnography. Ethnographers are cultural anthropologists who observe how consumers use products and services in their natural environments. They write reports using the words and phrasing of the people they study, and the information helps companies figure out the behaviors and reasoning behind people's purchasing decisions.

In addition, Blinkoff says 9/11 drove consumers to reconnect with their core values, and what's emerged in full force is the "prosumer," a term coined 25 years ago by business futurist Alvin Toffler to describe someone who is part producer and part consumer. Prosumers gravitate toward activities, such as knitting and book clubs, that combine creativity, consumerism and interaction within a larger social group. Blinkoff says the best products today, like the iPod, "let people put themselves into [them]."

Instead of boxing their customers into one profile, large companies are segmenting customers into ever-narrower lifestyle profiles and categories to understand their core values. They're targeting the 20 percent of customers who generate 80 percent of their business, says James Chung, founder of Reach Advisors, a Belmont, Massachusetts, strategy and research firm. Electronics retailer Best Buy, for example, now focuses its business on five customer profiles instead of trying to broadly tailor its marketing to fit every customer profile. Most entrepreneurs, however, still try to be everything to everyone by targeting a wide demographic. "Most small businesses are afraid of planting a flag and saying that their business focuses on a specific, high-value target audience," Chung says. "[But] it's a lot easier to focus on a profitable target, then do everything you can to engage them."