From the May 2005 issue of Entrepreneur

Editor's note: For a short history of demographics, click here .

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."

Sunlight Saunas, a 5-year-old Lenexa, Kansas, company that makes saunas that retail for between $1,695 and $5,595, separates its customer base into luxury and health markets based on data it gathers from visits to its website and conversations with potential customers. Two different markets require two different marketing messages, says CEO Aaron Zack, 29, who co-founded the company with his wife, Connie, 37, and Jason Lincoln Jeffers, 39.

"A lot of entrepreneurs get caught up in making sales, but they don't understand why and how they're making those sales," Zack says. "When you take the time to understand why and how, you can better take that product to your market." Company sales hit $6.8 million in 2004, and Zack projects sales of $12 million this year.

Demographics aren't becoming obsolete, Chung says--they're just taking on a new role as marketers get smarter in how to apply them. "People have become more interested in the range of data available," he explains. "There are other ways of looking at your customers."

Smith believes consumer attitudes will replace demographics as the basis for marketing execution, and companies will have to incorporate attitudes into their databases the same way they've used demographics in the past. "If you don't speak with lifestyle relevance to your customers, they'll tune you out," he says.

Understanding their lifestyles is crucial to understanding your customers, agrees Amy Jo Gladstone, whose $1 million-plus New York City company of the same name designs and manufactures women's footwear. "Without that, you're just a flat brand," she says.

For Gladstone, 44, understanding her customer is one part intuition and one part data mining. She uses an outside company to gather customer household income, age and other lifestyle information that helps her make marketing and product-design decisions. "[The internet] is how we learn about our customers," she says. "It's much more alive than an old [demographics] list."

The Age of Genergraphics

Understanding the influence one generation has on another will be the key to successful marketing in the future, contends Phil Goodman, president of market research and planning company Generation Transitional Marketing in San Diego. He's the creator of "Genergraphics," a method of marketing to customers of different generations by taking into account their generational mind-sets.

The internet, Goodman says, is tailor-made for Genergraphics. Companies will retool their websites using buzzwords geared to each of the major generations: seniors, boomers, Gen X and echo boomers. Customers visiting a company's website will click intuitively on the link meant for their generation, and then they'll see products and services described with generational buzzwords and images that fit their mind-sets.

Goodman claims Genergraphics will triple the chance of making a sale. "People buy different products and services according to their generations," he says. "You're not just wasting space or time on whatever advertising and marketing you're doing. You're gearing it toward that mind-set."

Goodman thinks boomer grandparents will be one of the most powerful groups 10 years from now. Some boomers are working on their third or fourth marriages and are bringing kids into the mix--from previous relationships and kids they have together--making blended families of forty- and fiftysomethings an emerging trend. Donald Trump is a famous recent example of a boomer blending two or more families.

But of all the major demographic categories, the most overlooked could be the Generation X consumer in his or her 30s and early 40s. "Up to this point, it's been the stepchild generation behind the powerful baby-boom generation, but Gen Xers are entering their peak earning years and peak buying years for many product categories," Chung says. "Marketers are only now trying to understand them."

Basic demographics still play a role in drilling down consumers, but companies need to go beyond demographics to spot emerging customer categories in a rapidly changing marketplace. "We're in the middle of a huge transformation in the shape of marketing," Smith says. "You've got to have better information about consumers." Call it the shape of things to come.

The Demographic Revolution

The following demographic groups should be on the radar of every smart marketer in 2005 and beyond.

  • Cablinasians: Tiger Woods coined this term to refer to his mixed racial heritage, and he's not alone: 1 in 16 Americans under 18 today is of mixed racial heritage. Marketers who tap into the multiethnic experience could win big.
  • Unmarried, professional women in their 30s and 40s: These highly educated women aren't weighed down by family responsibilities and have disposable income that high-end marketers are chasing, says James Chung, founder of Reach Advisors, a Belmont, Massachusetts, strategy and research firm.
  • Empty nesters: These are the boomers whose kids have moved out, creating a new stream of disposable income for these parents--and new marketing prospects for entrepreneurs.
  • Twixters: These are twentysomethings who've been so fussed over by their boomer parents that they can't deal with adulthood. According to University of Michigan, Ann Arbor, economics and public policy professor Bob Schoeni, cited in Time, the percentage of 26-year-olds living with mom and dad rose from 11 percent to 20 percent between 1970 and 2004. If they hold jobs, these young people have disposable income that's probably not spent on rent or mortgages. They also have parents willing to spend on them, too.
  • Gen X: The 44 million Gen Xers born between 1965 and 1975 are entering their peak earning years. They're raising families, they're tech savvy and they love to shop.
  • Boomer grandparents: Grandparents are becoming day-care providers to their grandkids, and in some cases even more: As of 2003, 900,000 grandparents had been responsible for most of the basic needs of their grand-children for at least five years, according to the Census. The number of boomer grandparents will only rise and increase in power as boomers age.
  • Progressive Prioritizers: Thirty-one percent of women 25 to 29 held a bachelor's degree or higher in 2003, compared to 26 percent of their male peers, according to Census data. What's emerging is a generation of young, educated women who are prepared to leave their jobs to stay home with kids and then return to the work force when they're ready. Savvy marketers will find ways to catch women as they go between both mind-sets.
  • Blended families: Younger boomers are remarrying. Some are even working on their third or fourth marriages and have kids in the mix, says Phil Goodman, president of Generation Transitional Marketing in San Diego.
  • Single mothers by choice: More women are having children without partners. In 2002, 12 percent of births were to unmarried women ages 30 to 44.

Demographics Timeline

A Brief History of Demographics

Early 1940s: The mass market reigns. TV and radio are dominated by sponsored shows such as "Bob Hope's Texaco Star Theater" with ads for big brands aimed at wide audiences.

1946: The "baby boom" begins. 77 million boomers will be the first generation to grow up with TV. The field of modern demographics develops around this explosion of births and migration patterns following World War II.

Late 1950s: Marketers use demographics and socioeconomics to segment the market into smaller groups of consumers who might buy their brands.

Early 60s: "Psychographics," which describes how attitudes and interests can be used to produce more effective advertisements, is on the rise.

1965: Forty-four million "baby busters," later known as Gen Xers, start to be born. This generation isn't considered big enough for marketers to bother with.

1971: Claritas is founded. Its products will allow companies to segment consumers into smaller and smaller groups based on psychographics and Census Bureau data. In 1978, Claritas developed ways of classifying whole neighborhoods with catchy names. New database "geo-demographic" systems let marketers apply psychographics to small, geographic areas. The information helps large retailers figure out where to build stores.

1978: Baby boomers start having kids. This 71-million strong "echo boom" generation will drive the Britney Spears-dominated youth market of the early 21st century.

Early 1980s: Marketers realize transactional data can drive marketing decisions. Bar code scanners are used in stores, and retailers begin to collect consumers' behavioral data.

1995: Websites start helping companies data-mine transactional data that's used to track customers' buying habits and drive marketing decisions.

1998: Web analysis tools like HitBox Professional start tracking web users using cookies, a precursor to today's annoying pop-up ads and spyware. Words like synergy are used endlessly to describe more sophisticated cross-promotions.

2000: Fledgling attempts at "neuromarketing," using brain scans to study consumer mind-sets. Ethnography, applying principals of anthropology to study consumers, is also emerging as a marketing tool.

2002: More thirtysomething Gen Xers are starting families. This yet-unnamed generation won't know a world without the web or wireless technology.

2005: Marketers are studying individual demographics and attitudes to create one-to-one marketing campaigns that can be sent to individual cell phones and PDAs.

2015: One-to-one marketing is the name of the game. Marketers gather the demographics and behavioral patterns of individual consumers to create individualized marketing messages. Even TV product placements can be geared to each household.