Simple equations can usually be applied to the pricing structure of everyday products we use and buy in the market. All you have to do is add up the cost of raw materials, cost of processing, the labor fees of workers, rental and etc…
When all the costs are added up, you can multiple the resulting amount by a certain profit percentage to get the final retail price. Depending on the type of product sold, this markup might vary from brand to brand and the complexity of the distributing system.
I know this might sound a little complicated but believe me, it is very simple once you understand the basic economic principles behind it.
On the other hand, diamond prices work differently. The system is the total opposite of the usual pricing mechanism used by other products. While it seems very simple at a first glimpse, you have to realize that it is mind-blowingly complicated on a deeper look.
Let us take a look at the different mechanisms which affects the final price of an engagement ring.
The market prices of uncut, rough diamonds can totally be separated from the market of polished gemstones. First of all, the preparation and even production (sic!) of diamonds now exceeds the need that society has. In order to keep prices stable, big cartels like De Beers control the flow of rough stones.
These cartels also control the mining, processing and marketing of rough stones. After rough diamonds had been mined, they are compiled into parcels that are presented to select companies – the sight holders – at events called sights.
De Beers usually organizes ten sights every year and the prices of rough diamonds are set by the cartels. At these events, sight holders are offered different compilations of roughs to work with and each parcel can easily range between one and twenty-five million dollars in value.
Did you know that the position of a De Beers sight holder is very delicate and hard to acquire? Due to the nature of doing business with De Beers, they rarely decline any compilation of roughs offered to them.
Be it profitable or non-profitable, doing so would risk losing their sight holder position should they reject and leave the parcel on the table.
Since these cartels are exquisite and hard to form a relationship with, they have the biggest say when it comes to determining the price of rough, uncut diamonds.
When it comes to polished diamonds, a whole new range of factors enter the equation. That said, the prices of polished stones are the result of a decision rather than of calculation. This decision is made by Belgian industry broker Martin Rapaport and his team, and the results reflect current market conditions and are published in the Rapaport Diamond Report.
The actual values presented in the report is only available to subscribers who pay an annual fee for the information. The factors that come into play on this level are usually the “four C’s” of diamonds: cut, carat, clarity and color.
The Rapaport Report classifies diamonds weighing between 0.01 to 5.99 carats and displays a price for any combination of the four main characteristics. Do note that the Rap price is a “high” price in which traders use as a reference for transactions.
Leaving the hands of the wholesalers, the prices of the individual stones are increased as the diamond passes through different hands in the distribution channels until they reach the shelves of your local jeweler.
If you have access to the Rapaport report, you might have noticed that the price list doesn’t show results for diamonds over six carats. You see, there is some irrationality when it comes to pricing these large stones. That is, we cannot say that a two carat stone is worth two times or three times more than a one carat stone. Typically, larger diamonds are auctioned off instead of finding their way into retail stores.
IDEX is a company who is a direct competitor to Rapaport. They also offer a B2B platform where people can buy and sell diamonds online. The distinction between IDEX and Rapaport is that IDEX discloses the methodology they use to determine prices to the public. While not as widely accepted by jewelers, they are slowly gaining traction in the industry.