How to Hack Diamond Pricing
The science, and art, of diamond pricing has eluded shoppers for over a century. We thought we’d shed some light on it.
The prices of commodities like gold, oil, and wheat are indexed by commodity markets, and their value is publically available. Called a spot price, these commodity market prices are the foundation of what we, and every other jewelry maker, pay for materials like gold and platinum. With diamond pricing, things are much more complicated. There is no spot price for diamonds because weight is just one of many variables that determines a diamond’s price. Calculating a market price per carat would be impossible.
Then how are diamonds priced? And how can a buyer know if they are paying a fair price? Read on to discover the secrets behind diamond pricing.
MINES AND THEIR ROLE IN DIAMOND PRICING
Diamond pricing starts at the mining companies. Rough diamonds are sorted and organized into parcels. These parcels are then priced by the mining company, and prepared for sale.
Broadly speaking, parcel pricing is determined by the level of supply and demand in the global market at that time. Diamond mines don’t have direct control over demand, but they do have control over what they supply. Like oil producers, mining companies exercise some restraint over how much product they release into the market. This practice has pros and cons for consumers. On the one hand, it makes pricing fairly stable, which means you don’t need to wait until the next economic catastrophe to buy a diamond. But it also means that the opportunities to buy diamonds at low prices caused by excess supply are rare.
MANUFACTURERS AND PRICING OPPORTUNITIES
Once parcels of rough diamonds are priced, they are sold to businesses that cut and polish them. These companies are called diamond manufacturers. About 90% of them are in India. They cut and polish the diamonds, and then sell them to wholesalers that serve regional markets. Cutting is a competitive industry and with pricing pressure on both sides, from the mines and the wholesalers, profit margins are thin. But, manufacturing is the most important step in determining a diamond’s price. Many decisions are made by the manufacturer that all have a single goal — maximizing profit. Understanding the different tactics that manufacturers use to maximize carat weight, optimize yield, and increase the selling price of diamonds, is one of the best ways an experienced diamond buyer can find a high-quality diamond at a good price.
Want to hack the cutting business? Here’s how:
THE ILLUSIVE .99 CARAT DIAMOND
1.0 carat diamonds retail for much more than similar 0.99 carat diamonds. It’s more profitable for cutters to produce a 1.0 carat diamond with bad proportions, than a beautiful 0.99 carat diamond. It might be too deep, too shallow, or asymmetrical, but a 1.0 carat diamonds will always sell faster and at a higher price.
If you can find a 0.99 carat diamond, it’s worth a look, you might get a very good price. Otherwise, if you are shopping very close to round numbers, like 1.0 carat, 1.5 carat, and 2.0 carat, you should expect to encounter diamonds that are cut poorly just to get them into that bracket. When looking at diamond pricing, pay careful attention to measurements and ratios, or move up to 1.1 carat or down to 0.8 where the quality of cut has a bigger influence on price.
WHOLESALERS AND THE MIDDLE MARKETS ROLE IN DIAMOND PRICING
Regional wholesalers buy diamonds from manufacturers and other sources like pawn shops, auctions, and estate sales. They sell them to retailers in local markets. Wholesalers often loan diamonds to retailers on credit until they sell. If you visit a local jeweler and view diamonds, it’s almost guaranteed those diamonds are on loan from a wholesaler.
What determines the diamond pricing for retailers is usually a combination of data and their negotiating talent. The data comes from the Rap Report, named after Martin Rapaport. It’s an index of diamond prices based on carat, color, and clarity. It’s primarily used by the wholesale trade as a benchmark for the market value diamonds categorized by three of the Four C’s, color, clarity, and carat. The Rap Report does not give guidance on cut. Cut is the most complicated of the four C’s, and combines multiple factors that play a big part in the actual beauty of a diamond.
The Rap Report is a good starting place for understanding a diamond’s price, but it has some limitations.
- It excludes cut which is one of the most important factors influencing price.
- It is not a “wholesale” price sheet. Dishonest sellers might tell you that it is.
Diamonds are sold by wholesalers at significant discounts off the Rap. Discounts can range from 10% to 40% based on the quality of the diamond. With all that variability, it’s best to understand that the Rap Report is a good starting place for understanding relative diamond pricing, but less helpful when it comes to a specific diamond. So what drives diamond prices?
DEMAND FOR DIAMOND CUTS
Demand for a cut and perceived scarcity has an undeniable impact on diamond pricing. For decades, round diamonds have remained the most in-demand diamond shape driving their price up and to the right.
Less popular shapes like marquise, triangle, and pear are typically affordable due to lower demand.
Certain diamond shapes are a better match for the naturally occurring crystal form of a diamond. These shapes minimize waste in the cutting process resulting in a lower price per carat.
Uniquely, the princess cut was engineered to minimize waste in the cutting process. The result? A much lower cost / carat. In contrast, rounds have a relatively high amount of waste and are more expensive as a result.
Tip: Be open to diamond shapes. If you’re coveting that brilliant, classic look, consider an oval. Harper No. 4, our oval solitaire, is one of our most popular settings.
CARAT SIZE AND ITS RELATIONSHIP TO DIAMOND PRICING
Diamond pricing increases in a non-linear fashion as carat weight increases. This makes it impossible to exchange two ½ carat diamonds for one full carat diamond of a similar quality as their value is not equal.
In practice this looks something like this:
- 1ct = $5,000
- 2ct = $15,000
- 5ct = $100,000
- 10ct = $500,000
A two-carat eternity band sells for about half the price of a 2-carat solitaire. If you’re looking to save money, a cluster setting is a great way to go.
Tip: The largest price jumps are at the half-carat and whole-carat marks. To get a better value, look for a diamond just shy of the carat market.
HOW GRADING LABS EFFECT DIAMOND PRICING
Similar to diamond pricing, diamond grading is not a science. There are a few major labs: the GIA, IGI and GCAL. Each one of these labs has different standards and different graders. The process is still largely manual (although it is beginning to transform through machine grading) and mistakes do happen. Quality is a huge driver of price, and for this reason, you don’t want to purchase an uncertified diamond no matter how good “the deal.” If it seems to good to be true, it most likely is.
Within the industry, the GIA is known as the most reputable lab and thus we use them for our natural diamond selection. Since the GIA does not grade lab diamonds in the same way as natural diamonds, we use the IGI or GCAL for these types.
Last but not least is scarcity. While many diamonds are not scarce, some are. This can be due to their unique inclusions.
Diamond margins vary on two axis — size and retailer. Generally speaking:
- Smaller diamonds have higher margins than larger diamonds.
- Brick and mortar retailers have higher margins than online retailers
- Luxury retailers have the highest margins + brand tax
So the best value would be found purchasing a big-ish diamond online, while the worst value would be found purchasing a small diamond at a luxury or mall retailer.
Diamonds used to have much higher margins across the board, but this has come down over the past decade as online businesses have brought more transparency to the market.
The price per carat of diamonds has increased at roughly 4% year over year for the past ten years and this is expected to continue.
While the perception is that diamonds are a poor investment, the reality is that as a wholesale commodity diamonds have largely held their value, but that does little to assuage the fact that most people were misled by the salesperson or significantly overpaid.
Which brings us to the resale market. Most people don’t know, but 1/10 diamonds sold new is actually recycled. Today, there is an estimated 1 trillion dollars in diamonds locked in safety deposit boxes across the country.
These diamonds are bought back by sites such as “I do now I don’t,” and “worthy.”
After purchase, the diamonds are sent to India where 90% of the worlds diamond cutting and polishing happens. They are recut to maximize their price per carat, recertified by the GIA and sold again as new at prices competitive with newly mined diamonds.
This sector accounts for 5%–10% of market supply.
LAB DIAMONDS VS. NATURAL DIAMONDS
Lab diamonds are a new and exciting trend rapidly gaining momentum. They currently represent about 1% market share but are growing at 3-4x the speed as the natural diamond industry.
As technology has evolved over the past few years the price of lab diamonds has fallen from 80% of a natural diamond to about 50% of a natural diamond.
The major cost driver for lab grown diamonds is electricity cost.
It is more difficult and takes longer to grow a larger lab diamond than a smaller one, and thus they follow the same pricing model as naturally mined diamonds, increasing an exponential rate in response to carat weight.
INVESTMENT GRADE DIAMONDS
Generally speaking, only fancy color diamonds will appreciate over time, as opposed to colorless diamonds whose value either remains the same in real terms or drops.
Rare “fancy colored diamonds” such as yellows, pinks, blues, and greens have proved to be a secure investment over the past five years.
So to go back to where we started. How do you if the diamond you’re purchasing is a good value?
- Buy online.
- Make sure the diamond is certified.
- Have the diamond certified if it’s not (anyone can do this, you just call them).
- Realize that smaller diamonds have higher margins than larger diamonds.
- Consider a less popular (more interesting) or less wasteful stone shape such as a princess, oval pear or marquise.
Realize that the diamond value does not equal the price you pay for the ring.