Why Are Some Diamond Brands So Expensive?

One of my first full-time jobs outside of college was working in the jewelry industry at Harry Winston in Manhattan. The experience I gained as a sales assistant, working at the historical house of Winston, expanded my understanding of the power of a brand.

The amount of money customers would spend on a Harry Winston diamond, while scoffing at what was down the street at Tiffany’s, seemed absurd. I was on a yearly salary of $35k, and people were dropping more than that amount on a tennis bracelet with less than 30 minutes of deliberation.

This was truly curious to me. If these people are so rich, they must be somewhat smart, and yet they were spending an unnecessary amount on a speculative commodity. Let me explain. For my position, I was trained on the 4C’s of a diamond: cut, clarity, carat, and color. The only thing that really mattered was the 4C’s and a trustworthy gemology report.

A diamond at Tiffany’s could have had the same cut, clarity, carat, and color as a diamond in one of Harry Winston’s display cases, but our store could charge more because of the name and notoriety. The same was true for Tiffany’s and their robin’s-egg blue hue packaging that put any diamond of equal quality at Zales to shame.

People weren’t just purchasing jewelry, I realized. They were paying for bragging rights.

In fact, my manager at the time made it clear she only intended to work at Harry Winston until her boyfriend proposed and she could get a discount on the diamond of her dreams. Even with a discount, I found that silly. Later in life, for my engagement ring, I helped my husband find a great gem at a great price on eBay with a gemology report and all. His debt is my debt after all.

As for my manager, I never found out if the proposal ever came. I was not cut out for city life and wasn’t there long enough to see it happen. However, my short stint at one of the greatest jewelry salons in the world made my passion for business studies soar.

I am fascinated by brands to this day, and one of the most impressive forms of marketing of all time is De Beers’ ‘A Diamond is Forever’ campaign. In fact, without De Beers, Beyoncé’s Single Ladies song would make little sense. Putting a ring on it was simply not done until De Beers came up with an ad campaign for doing so.

Yet, even though De Beer’s can take the credit for making diamonds a symbol of love and commitment, it was Harry who came to be known as the king of diamonds, despite opening his business 44 years after British businessman Cecil Rhodes established De Beers in 1888.

The keys to the castle, you see, are determined by consumer interests and demand. So whether the rock is clear like ice or cool canary yellow (as featured by Kim Cattrall) or a vibrant pumpkin orange (as adorned by Halle Berry), its value comes from the perceptions and preferences of consumers.

It is the consumer who holds the power via their purchase.

This insight relates to a favorite economic lesson that I learned in college and got to see play out at Harry Winston. The lesson is about the diamond-water paradox, which starts with the 18th-century Scottish philosopher and father of modern economics—Adam Smith.

Smith was baffled by the fact that diamonds, with little practical use, were valued far more highly than water, with all its functional utility. Consider this passage from The Wealth of Nations, Book I, Chapter IV.

The things which have the greatest value in use have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.

Fortunately for Smith, and the rest of us, this riddle was solved in the late 1800s by the Marginalist Revolution in economics.

Carl Menger was one of the great thinkers who realized that it is marginal, not total, utility that matters. In simple terms, water may be more useful but it is also very plentiful; so the next glass of water—the marginal glass—is a minuscule portion of the overall supply, and hence is not particularly valuable. Diamonds, on the other hand, are quite scarce, so the marginal diamond is often quite valuable, especially when effective marketing campaigns create a lot of demand for certain kinds of diamonds or certain diamond brands. Hence the economic method of ‘thinking on the margin’ when assessing benefits and costs.

Thinking on the margin, along with having some brand awareness, will make you not only more clever as a consumer but more resourceful as an individual. Remember that engagement ring I got off eBay? Well I also had a more than affordable wedding by taking things down to first principles. I didn’t need a wedding dress, I needed a white dress (thank you Lord & Taylor at Rockaway Mall in New Jersey). I didn’t need an open bar, I needed several cases of alcohol (thank you Delaware for the tax savings). I didn’t need professionally made bouquets (thank you Hobby Lobby for the fake floral section and 40% coupons). Nor did I need full-service catering (thank you husband for your hunting skills). I loved how our wedding turned out, and now I love that I can splurge on experiences and brands as my purchasing power has increased.

So, in short, if you have the means, buy the best brand, but if you don’t, be sure to think on the margin till you can.

Editor’s note: This article originally was published by the Foundation for Economic Education.