Natural polished diamond countermarketing essentials. Part 1. Cost.

A few preliminary notes are as follows:

- Declaring Russian natural rough and polished diamonds “bloody” and “unethical”, the refusal of world jewellery brands to use Russian diamonds, as well as the refusal of leading gemological laboratories to certify them and a possible G7’s decision to ban the import of polished diamonds of Russian origin into these countries - all these measures hit hard the image of a natural diamond as such and make any generic marketing efforts useless. 30% of the world diamond market actually became illegal and the access of one of the key diamond industry players to civilized sales channels was prohibited. Of course, Russia will not stop diamond mining, and diamond export will be carried out using ‘shady’ and ‘illegal’ schemes, with inevitable dumping, which makes the existence of the Kimberley Process meaningless, as well as of other industry organizations declaring the principles of transparency and ethical responsibility of the diamond industry, and the image of a polished diamond as an “eternal value” will be irreversibly destroyed although this image has been developed over a century;

- Under the current conditions, the cannibalization of the natural diamond market due to the use of synthetic diamonds (hereinafter referred to as lab-grown diamonds, LGDs) becomes an urgent task, and the development of an appropriate countermarketing model is required to complete the task. The cannibalization has already begun, which is especially noticeable as LGDs intensively penetrate into the engagement and wedding jewellery sector. Obviously, the hopes for dividing the markets failed, as well as the attempts to reduce the importance of LGDs to the level of fashion jewellery (an engagement ring is not a fashion jewellery by definition). However, countermarketing efforts are sporadic, superficial and unprofessional at present, and they are clearly insufficient to ensure the rapid development of the LGD sector using a unique chance it had;

- The analysis of the industry structures responsible for the generic marketing of natural polished diamonds shows their inability to solve the tasks set. The reason is objective: the current image of a natural polished diamond excludes any possibility of using historical content that is the only marketing advantage of natural polished diamonds over LGDs. This makes it necessary to copy the marketing models of the 1950s created in the absence of a strong generic competitor; these models are not effective in relation to the present and future generations of polished diamond consumers.

In connection with the above, it seems logical to define problem as follows - “Assuming that a natural polished diamond is a classic “Veblen good” and is used to satisfy not vital but social needs, its informational shell should be transformed in such a way that it should acquire a negative consumer value in the eyes of buyers. The concept of a “natural polished diamond” should fill consumers with repugnance and fear at the level of logical thinking and at the emotional level. At the same time, it is necessary to maintain and even increase the consumer interest in diamonds, orienting them towards purchasing LGDs.”

The proposed countermarketing model is an information space oriented along three interrelated axes conventionally designated as “Cost”, “Ecology”, and “Karma”. The length of the axes is a time interval covering the period from the last decade of the 19th century to the present day, i.e., the entire period of existence of the modern diamond market. Of course, the format of publications on Rough&Polished does not allow a detailed description of the composition and content of the information blocks along each axis, so the principles of their formation will be illustrated only. The specific implementation technology of the developed model will not be described either, since it is rather simple and is a compilation of well-known marketing techniques and PR programmes widespread in the Internet era. The purpose of this and subsequent publications is to reveal the semantic core of the countermarketing model, its basic framework.

Let’s start with “Cost”.

Take, for instance, two actual natural polished diamonds. Polished diamond No. 1 (GIA REPORT 2221760501) with the following characteristics: Round Brilliant cut 57, 2.01-ct weight, E colour, IF clarity, “Triple Excellent” cut, no fluorescence. It is offered for sale for $57,660.00 (at the time of this writing)¹.

Polished diamond No. 2 (GIA REPORT 2417430941) with the following characteristics: Round Brilliant cut 57, 2.01-ct weight, E colour, IF clarity, “Triple Excellent” cut, no fluorescence. It is offered for sale for $62,796.00 (at the time of this writing)².

The difference in price is $5,136, or 8.9% of the price of the Diamond No.1, both stones having exactly the same characteristics and offered by the same seller!

An “aware”, “informed” and “educated” buyer of natural polished diamonds probably knows what 4Cs are (Colour, Clarity, Cut, and Carat weight). It is the 4Cs that allegedly are the pricing factors for a polished diamond - such a mantra is on every website of polished diamond dealers. But in this case, the 4Cs of the two polished diamonds are absolutely identical, why the difference in prices is so great? What are the differences between these two stones?

There are differences. They are in the polished diamond cut grades. The GIA certificates show that the pavilion angle of Polished diamond No.1 is 41.6° and it is 41.2° in Polished diamond No.2, the depth is 61.9% and 62.6%, respectively, etc. These values differ from the parametres of a perfect Tolkowsky polished diamond (pavilion angle 40.75°, depth 59.3%, etc.). And based on these deviations from the ideal mathematical model of a polished diamond, the seller determines the difference in prices.

But GIA experts assigned the highest quality category “Excellent” for the considered stones in the columns “Cut Grade”, “Symmetry” and “Polish”, therefore, the differences between the two polished diamonds from each other in these parametres are insignificant. “Triple Excellent” for Cut, with other completely identical indicators, means that both samples under consideration are so close to the ideal Tolkowsky polished diamond, and, accordingly, to each other, that their difference in geometry can be considered a tolerance, as it is understood in mechanical engineering - i.e., permissible deviations of parametres within a given range that do not have any effect on the product’s operation (in the case of a diamond, on visual perception under normal conditions). But when you buy a gear for a gearbox, it would never occur to anyone to charge you extra money for having its diameter close to the upper (or lower) tolerance value. And in this case, the consumers are offered to pay much for the difference, which they cannot evaluate on their own and even see.

Just imagine that you come to a party wearing a diamond pendant, and your envious friend - seeing a sparkling two-carat diamond - says: “You know, my dear, the pavilion angle of your diamond is 0.45° more than that of the Tolkowsky diamond! It isn’t any good!” And giving you a triumphant cold look, she proudly moves to the bar counter ... Or you come to a car dealership to buy a car you like, and a manager says, “Here are two absolutely identical BMW cars of the series you need. They are absolutely identical as their colour, equipment, engine, and interior are the same. But using non-destructive testing methods, we found that the metal of the left front wheel hub of this car contains 0.00003% more carbon than that of the other car. It absolutely does not affect anything - neither the car life time, nor its safety, nor the car handling ... But since more carbon is used for this car, we still ask for an additional $5,136, and I strongly recommend you to buy this particular car!” Probably, in the evening you will tell your wife, “You know, dear, some impudent swindler tried to cheat me at a car dealership! It was so funny!”

The above example is not a single one, it is easy to find a lot of similar cases at the websites of major polished diamond dealers. This circumstance alone forces us to admit that the pricing mechanism in the natural polished diamond market is not transparent for the end consumers and obviously does not work in their favour. But such dubious pricing schemes are not typical of our time only, on the contrary, sophisticated price management in the interests of a seller has been, is and will be the very essence of the natural polished diamond market throughout its history. We have a huge amount of historical material at our disposal to prove this. The material is quite enough to firmly convince consumers that they sure become victims in the natural polished diamond market. But at the same time, a consumer should not have the feeling of a person whose wallet was pulled out by pickpockets at a flea market. No, it was just like a visit to the Count Cagliostro’s salon, where the buyer was gracefully cheated under the smoke of an expensive cigar and a glass of collectible cognac. Really, it was wonderful! Consumers should not lose interest in polished diamonds and the proposed image of the polished diamond market as an ingenious value-manipulating scam lasting over a century solves this problem. What could be more interesting than watching the adventures of talented swindlers? From the “Rhodes Formula” to the “Diamonds Do Good”! Of course, they do good, and they are good at this - $5,136 were created from thin air! The Lord would envy such a way of creation!

Is it possible to sell the difference in parametres that are below detectable limits (to the naked eye) to the consumer in the LGD market? Let’s take a look at the website of one of the most reputable LGD manufacturers and sellers today - LIGHTBOX³. Near Colourless (G-J) 2-ct diamonds featuring a Round Brilliant cut 57, VS clarity, VG cut are offered in unlimited quantities at a price of $1,600 per piece. And (attention!) the seller honestly warns that their weight can range from 1.95 ct to 2.1 ct, and the girdle diametre (the most important Cut Grades of a polished diamond are determined in % of a girdle diametre) can range from 7.8 mm to 8, 2 mm, without changes in prices. Or, to put it another way, if the parametres of polished diamonds do not go beyond the tolerance limits within which the difference between the stones cannot be determined with the naked eye, the price should remain the same. We have to admit that this is an example of transparent and honest pricing, which is in stark contrast to the “alchemy” of prices in the natural polished diamond market.

So, let’s assume that the natural polished diamonds are sold. The dealer got the money, the consumers got their sparkling crystals. Who has benefited from the deal from the point of a ‘store of value’ view? Everything is clear with money, but, maybe, natural polished diamonds really retain and multiply the money invested in them? Maybe, in fact, you invested in an ‘elixir-stone’ turning time into gold? Let me quote from Edward Epstein’s old classic article “Have You Ever Tried to Sell a Diamond?” (1982), “The magazine conducted another experiment to determine the extent to which larger diamonds appreciate in value over a one-year period. In 1970, it bought a 1.42 carat diamond for £745. In 1971, the highest offer it received for the same gem was £568. Rather than sell it at such an enormous loss, Watts decided to extend the experiment until 1974, when he again made the round of the jewelers in Hatton Garden to have it appraised. During this tour of the diamond district, Watts found that the diamond had mysteriously shrunk in weight to 1.04 carats. One of the jewelers had apparently switched diamonds during the appraisal. In that same year, Watts, undaunted, bought another diamond, this one 1.4 carats, from a reputable London dealer. He paid £2,595. A week later, he decided to sell it. The maximum offer he received was £1,000.”⁴ Do you think anything has changed since then? It’s easy to check - buy a 2.01-ct “investment” diamond featuring a Round Brilliant cut 57, E colour, IF clarity, “Triple Excellent” cut, no fluorescence. It is offered for just $57,660.00. And try to sell it in a week. I’ll bet you a good bottle of whiskey that you can’t sell it better than at a 25%-discount. Because in the general case (if we are not talking about the stones with outstanding mineralogical characteristics, or of proven provenance, which is important for the antique market), the value of a natural polished diamond is a function of the efforts of marketers who turned a piece of crystalline carbon into a symbol of a several generations’ dream. Actually, a polished diamond does not have an inherent value and, in fact, an information shell is sold to consumers, without which the “polished diamond” concept does not exist. Such a commodity may preserve its value, but the value is obviously reversible. And a properly built countermarketing company can reset it to zero.

And what about the LGDs as a store of value? Here is a quote from another diamond market guru’s article saying that “The value of these diamonds is consistently falling. Despite their lack of natural scarcity, they are sold as comparable to natural diamonds without full disclosure as to their inability to retain value.”⁵ This statement is absolutely right. It is even easier to check than in the case of natural polished diamonds, since the experiment will cost much less. Buy a two-carat polished LGD from LIGHTBOX (Round Brilliant cut 57, Near Colourless, VS, and VG) for $1,600 and try to sell it in a week. You probably won’t get a cent for it. However, the seller honestly warns that “As a relatively new manufacturing process, it’s reasonable to expect the cost of production to fall, and lab-grown diamonds purchased at too high of a price will lose value as similar stones will become available for a lower cost.”⁶

But keep in mind that in the case of the natural polished diamond, you will lose about $14,000 on your “investment”, and you will lose $1,600 only on your “investment” in LGD. By the way, this is all you need to know about investing in polished diamonds.

Representatives of diamond mining companies and diamond polished dealers are constantly talking about the upcoming shortage of natural rough diamonds. According to them, the diamond production will decline in the future due to the depletion of existing mines and the lack of new deposit discoveries, which is supposedly a factor in the stable growth in prices for natural polished diamonds in the foreseeable future. The positioning of polished diamonds as a product that obeys the law of supply and demand in its simplest interpretation is fundamentally wrong. Here is a suitable analogy: in the 15th and 19th centuries, there was a huge market for ostrich feathers, it was a coveted and expensive accessory for clothing, from military uniforms to ballgowns. But today, you can hardly meet a lady in a feather boa or a brave officer with a plume of feathers. The market has decreased in volume hundreds of times, in fact, there are sub-marginal ostrich feather niches to be used for stage costumes or by flamboyant couturiers. Are there no more ostriches or, vice versa, is their number too great? No, it’s just that the accessory is no longer in fashion and there is no demand for them in the market. Just make natural polished diamonds be out-of-fashion, and it will not matter how much rough diamonds remain in the ground.

And finally, we will touch on another very important topic directly related to the problem of cost. Apologists for natural polished diamonds are very fond of analogies with the market for coloured stones where synthetics have not replaced natural coloured stones. Here is an example of such reasoning: “Ultimately, the trade in synthetics will come crashing down as prices for synthetics continue to fall. This is what has happened to synthetic rubies, emeralds and sapphires.”⁷ This seemingly perfect analogy has one very serious mistake. Indeed, manufacturers of coloured synthetic stones do not make any serious efforts to cannibalize the markets for coloured natural stones. But why?

Let’s take a look at the sapphire market, for example. Today, the value of the market for synthetic sapphires (rough ones) is almost 4 times HIGHER than the value of the market for natural sapphires⁸. Their scope of application is huge, from watch glasses and smartphone screens to lasers, and it continues to expand, with demand growing exponentially. There is no need to cannibalize the relatively small market for natural gem-quality sapphires as the game isn’t worth the candle, in terms of cost or possible profit. For comparison, cultured pearls quickly and almost completely cannibalized the market for natural pearls, as soon as the cultivation technology was developed to the level of its commercial application. As cultured pearls have no use other than in jewellery, the cannibalization of the natural pearl market has been an inevitable outcome.

But the market for synthetic rough diamonds (industrial and gem-quality roughs) is 4 times LESS than the market for natural rough diamonds used mainly for manufacturing the polished diamonds. A well-fed calf grazes in this meadow, under the admiring gaze of steak lovers. Here, the cannibalization of even 30% of the market promises a ‘jackpot’, which is several orders of magnitude higher than the cost of countermarketing. There is still room for improvement.

So, the “Cost” line of the proposed model should firmly convict consumers at the level of their logic and emotions that they can act exclusively as victims in the natural polished diamond market, since the pricing mechanism is not transparent for the buyers, and price management in the interests of sellers has been carried out throughout the diamond market history. At the same time, the image of the natural polished diamond market should be formed as a century-long brilliant scam and as the manipulation of cost and also of mass consciousness, as well as a scam that is extremely interesting to watch, especially to participate in its disclosure, but, in no case, become its victim. As for their “Cost” line, the LGDs’ image should be formed as an example of transparent pricing, and the acquisition of LGDs should be positioned as an absolutely fair deal. The consumers must be convinced that natural polished diamonds and LGDs compete not on the price, but on the pricing principle.

To be continued.

Sergey Goryainov, Rough&Polished

¹ https://shop.bntdiamonds.com/en/diamond-detail/cn-2221760501
² https://shop.bntdiamonds.com/en/diamond-detail/cn-2417430941
³https://lightboxjewellery.com/collections/lab-grown-loose-diamonds/products/loose-stone-round-brilliant-2-carat-white
⁴ Have You Ever Tried to Sell a Diamond? February 1982 Issue. By Edward Jay Epstein. https://www.theatlantic.com/magazine/archive/1982/02/have-you-ever-tried-to-sell-a-diamond/304575/
⁵ https://forums.rapaport.com/forums/discussion/rapaport-new-year-message-january-17-2023-3/
⁶ https://lightboxjewellery.com/pages/our-pricing
⁷ https://forums.rapaport.com/forums/discussion/rapaport-new-year-message-january-17-2023-3/
⁸ https://www.skyquestt.com/report/sapphire-market