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Can You Solve ‘The Case of the Sinking Diamond’?

The buyers of a lab-grown diamond ring, needing a replacement, are dismayed to discover the plummeting value of their original purchase.

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IN THE HEART of the Midwest, McKinley’s Jewelry, an iconic multi-million-dollar store, stood proudly, renowned for its impressive collection of high-end brands. For generations, this family-owned establishment had been synonymous with honesty, integrity, and creating extraordinary experiences for its clientele.

ABOUT REAL DEAL

Real Deal is a fictional scenario designed to read like real-life business events. The businesses and people mentioned in this story should not be confused with actual jewelry businesses and people.

ABOUT THE AUTHOR

Megan Crabtree is the founder and CEO of Crabtree Consulting. Before founding Crabtree Consulting, Megan had a successful professional career in the jewelry industry, which culminated with high-level positions at several of the top firms in the retail and manufacturing sectors. Reach her at mcrabtree@crabtreeadvisory.com or visit us at www.crabtreeadvisory.com where you can set up a live chat or a 30-minute free consultation.

 

The McKinley family took immense pride in their collection of quality diamonds sourced from reputable suppliers. However, with the emergence of lab-grown diamonds, they found themselves at a crossroads, contemplating whether to embrace this new trend. Mindful of their responsibility to cater to customer preferences, they made a decision to offer lab-grown diamonds only to those who specifically requested them. These stones were not displayed on the sales floor but stored in limited quantities in the stockroom, obtained from trusted vendors on a memo basis. The McKinleys took great care to educate their customers about the advantages and disadvantages of lab-grown diamonds.

They candidly shared their uncertainty about how the value of these diamonds would hold up over time and emphasized that they would not offer trade-in policies for lab-grown diamonds due to the ever-evolving nature of the market.

In 2019, Jonathan and Olivia Comstock entered the showroom. Their family had been patrons of McKinley’s for generations, so they already had a deep-rooted sense of loyalty to the store. But today was a special visit: They were there for an engagement ring. They had a budget of $14,000 and had their sights on a lab-grown diamond.

Samuel McKinley, the store owner, took time to explain the drawbacks of purchasing a lab-grown diamond, drawing a parallel to the early days of plasma televisions. He highlighted how plasma televisions were once cutting-edge technology and highly sought after but eventually declined in value as newer technologies emerged. Samuel wanted to be sure that Jonathan and Olivia made an informed decision.

Despite Samuel showcasing a variety of naturally occurring diamonds, the couple remained resolute in their desire for a larger stone. With a lab-grown diamond, their budget could afford a 3.8-carat gem, compared to a naturally occurring diamond of approximately 1.5 carats. They were undeterred by the difference in trade-in policies between naturally occurring and lab-grown diamonds, as they had no intention of parting with the ring in the future. Taking their informed decision into account, Samuel carefully handpicked a 3.8-carat G/SI1 lab-grown diamond that would meet their expectations.

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Four years later, Jonathan and Olivia found themselves reaching out to McKinley’s for assistance. They told Samuel that their beloved diamond ring had been lost at the bottom of a lake and that they urgently needed a suitable replacement.

The couple had already contacted their insurance company, notifying them of the lost diamond. Fortunately, they had “Stated Value” insurance coverage, which meant their insurance company would issue a direct check for the full amount of their initial purchase, $14,000, even before they explored alternative options at the store. Had they opted for “Replacement Value” insurance, which would have covered the cost of a diamond of equal or greater value, the insurance company would only have issued a check to the store for the current value of the ring.

As Samuel began sourcing similar lab-grown diamonds, he made an intriguing discovery: The cost of these diamonds had significantly dropped from 2019 to 2023, effectively halving the price. He found that similar lab-grown diamonds were currently being sold for approximately $6,800. This realization raised a crucial question: Should he retain the previous markup and sell the diamond at $14,000, maximizing profit, or adjust the price to reflect the current market value of $6,800?

Understanding that customers now have the opportunity to research and compare prices, Samuel recognized the importance of aligning the store’s pricing strategy with market realities. Selling the diamond at the previous value of $14,000 would not only appear unfair but could also damage the store’s reputation if the couple found the same product at a significantly lower price elsewhere.

When Jonathan and Olivia returned to the store, Samuel presented them with the newly sourced lab-grown diamond. While Olivia was initially excited to discover that it looked nearly identical to her original diamond, their excitement was quickly diminished when they saw the appraisal revealing a significant drop in value. Despite receiving a $14,000 check from their insurance company, they couldn’t shake the feeling that they had paid a higher premium for something that was now considered overvalued.

The Big Questions

  • How should Samuel address Jonathan and Olivia’s concerns about the value of the lab-grown diamond?
  • What steps should he take to ensure their continued trust and satisfaction with the store? Did Samuel make the right decision by selling the lab-grown diamond at the adjusted market value?

 

Heather W.
Des Plaines, IL

This is all about the presentation. The customers were wise in their insurance choice and received a check for the amount they spent. They had the opportunity to purchase lab-grown diamonds at the early part of a technology-based product and enjoy it. They can now spend less to get the same thing and pocket the difference or get something with the remaining amount. It appears the store was ethical in sharing the realities when the purchase was made and selling the new diamond at a market appropriate price. Another option if they don’t like the volatility of lab pricing would be to make the decision to switch to mined. This conversation isn’t any different than if they had purchased gold and the gold market had gone down.

Jim D.
Kingston, NH

Samuel did what justice may demand, bravo. His customers should be kissing the feet of whomever suggested the insurance they bought, while being thrilled the ring took the plunge. Too many who bought lab diamonds are finding no market for their secondhand lab -reated diamonds. At least they can pocket the difference; so many have to eat the difference. Ask me again why I don’t sell lab-grown stones …

Andrew G.
Chula Vista, CA

I would have given them the option to upgrade in size or at least color and clarity grade. This would be viewed as a win-win for both parties instead of focusing on the decrease in value. The win for the store would be them selling a stone with a greater cost than just replacing the original. The married couple would get a better stone with an increased value, which the new appraisal/receipt would reflect.

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Tigran M.
Acton, MA

Samuel should approach Jonathan and Olivia with honesty and transparency. He should explain that the decrease in value of the lab-grown diamond is a result of market fluctuations and changes in the industry. Samuel should emphasize that their initial purchase was made with their informed decision and preferences in mind, and that the price drop is not a reflection of the quality of their original choice. Assure them that the value of the diamond they chose back in 2019 was accurate at the time. Samuel’s decision to adjust the price of the lab-grown diamond to reflect the current market value is the right choice. Selling the diamond at the inflated previous value of $14,000 could have risked customer dissatisfaction and damaged the store’s reputation. By aligning the price with the market reality, Samuel is demonstrating transparency, fairness, and a commitment to customer satisfaction. Samuel should explain his decision to Jonathan and Olivia clearly and to emphasize that this decision was made to ensure their best interests.

Garry Z.
Chicago, IL

Fortunately, Samuel did attempt to explain the market trends when Jonathan and Olivia made the initial purchase. At this point in time, he needs to explain further what has transpired in the lab-grown diamond market. As with any product that becomes overproduced, mass-merchandised and floods the market, the price will make dramatic decreases. The more machines that come online, the greater the supply of lab diamonds, and in fact this is directly reflected in the precipitous price drop that we’ve all witnessed over the past few years. He should explain that lab diamonds have the same characteristics as a natural diamond, but prices are continuing to drop and they should be aware of this and just enjoy what they have. No one can visually see the differences, and fortunately for Jonathan and Olivia, they have a check in hand from the insurance company for the original price they paid. Now they have extra money in the bank to enjoy as they see fit.

Samantha M.
New Oxford, PA

I would reiterate to the customers that the market for lab-grown diamonds has changed significantly from when they purchased years ago, as predicted. I would be sensitive to their feelings and agree that this is unfortunate, but at the end of the day, you cannot control the market now or in the past. He did the right thing in being honest about the current value and he should point this out to make sure they know he has their best interests in mind and would never mislead them in order to make a higher margin.

Arun B.
Philipsburg, Saint Maarten

To address their concerns, Samuel should approach Jonathan and Olivia with transparency and empathy. He can explain the market dynamics behind the diamond’s devaluation, apologize for any inconvenience, and candidly admit the difficulty of predicting the future value of lab-grown diamonds. Samuel should emphasize his commitment to their satisfaction and suggest solutions like refunds or store credit to regain trust and satisfaction:

Openly discuss the devaluation factors, demonstrating his dedication to finding a fair solution.

Offering choices such as partial refunds or store credit empowers Jonathan and Olivia to select their preferred resolution.

Samuel should clarify the uncontrollable impact of market changes and reassure them that he’s working to address the issue in a way that respects their interests.

Regarding the decision to sell the lab-grown diamond at the adjusted market value, Samuel made a wise call. Selling it much higher than market value could erode trust and taint the store’s reputation. Aligning the price with market trends showcases ethical practices and prioritizes customer satisfaction over immediate profit, a prudent and equitable choice.

Maarten D.
Boise, ID

The store handled this beautifully all the way down the line. The clients were well informed and well insured. Win, win, win. The wakeup call is that with clients lacking this particular type of insurance coverage, this situation has a huge potential to be calamitous at best and disastrous at worst. Money, value, profits, reputation, and future confidence in diamonds would all be at risk.

Sherrie L.
Sharon, WI

This jeweler has done the ethical, fully honest thing. He can remind them of the conversation he had with them at time of purchase, and the comparison with plasma TVs. He can also talk himself blue in the face, and they might still be not fully happy. Welcome to dealing with the public.

Sandy K.
Olympia, WA

We’ve actually run across this same scenario twice this year. Samuel explained the price drop situation with lab-grown diamonds when he sold them one initially. He should take his normal markup on the replacement lab-grown diamond. He might want to take this opportunity to sell them a natural now that his clients understand the drop in value of labs firsthand. My guess is they’ll take another lab and drop the $7,200 difference in some fake Louis Vuitton.

Lamar M.
McComb, MS

Honesty is always the best policy. Inform them of the raw facts and take your lumps. This price change was neither orchestrated nor predicted by you (unless you had a crystal ball?). Lesson learned. Be upfront with your customers and let them know that there is no guarantee that any of your products will be market change resistant. Tell them that historically, diamonds have held their own, but there are no promises. It’s still too early in the lab-grown diamond evolution to predict where pricing is going to go. Our client base seems to be more price conscious than other considerable factors. Therefore, lab-growns are winning the battle so far.

David B.
Calgary, AB

“I told you so!” That is the sentence ringing in my ears. And to my New York friend in the business telling me, “Are we people’s financial advisors?”, wait this will happen to you … and you …

The store was correct in adjusting pricing even if it had to be explained. Honesty is always a better approach. Samuel did address the situation correctly, and he should feel good about the situation. What will the value of LGD be in the future is not something anyone can predict accurately, but the bottom has not been reached. Maybe if LGDs become useful in semiconductor applications, overproduction and oversupply will soften and prices stabilize.

For now, everyone that sells LGDs should be prepared for a situation like this to walk into your store.

J. Dennis P.
Johnstown, PA

A store’s reputation and good name are worth far more than a windfall profit. Full disclosure is required here. The specifics should be presented and allow the customer to realize the “windfall” from the loss as a result of the type of policy they purchased. For certain, they paid a premium for the type of policy they had, and in this situation, they are winners in the outcome. As the jeweler, I would offer an even more dear lab-grown diamond using up the full $14,000, or take the opportunity to move up to a genuine naturally occurring diamond, which would have ever increasing value. The lab-grown diamonds most likely will continue to drop in price per carat. Look at what a 1-carat CZ cost in 1978 and what they cost now. I’ve yet to see any market for traded-in lab-grown diamonds.

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Leo A.
St. Louis, MO

First, I would be shocked if a customer would be upset that they paid for a “stated value” policy, got the stated value and were able to keep $7,200 to put in their pocket. I am pretty sure that the total premium paid was well less than the $7,200. On the rare case of stated value policy, you are paying for the fixed amount, whether replacement is higher of lower. The insured is taking the risk on only the upside; they are not paying premium for a higher amount only to get less.

Brenda M.
Designs By Nathan

I believe that Samuel made the right decision by presenting the current market truth.

I would have given the couple more options, though:

Exact same ring, only at $6,800, explaining that he bases his prices on current market costs. When gold is more expensive, he has to price higher, etc., but in this case the cost of lab-grown diamonds had significantly declined due to substantially greater supply and so they had the opportunity to save $7,200.

Exact same ring but with a better lab-grown diamond. I’d look at the unbelievable liquid sparkle of an 8X cut diamond with better clarity that matches the $14,000 original price (so opportunity to upgrade).

Exact same ring but with the largest eye-clean, good color natural diamond that puts the price at $14,000. He can explain this will give them the opportunity to change over to a natural stone that will retain a more stable value as the supply is more fixed.

These options put the couple in control, which builds trust.

Gene P.
Tuscaloosa, AL

This is a great story. It makes me think of another problem. We are insured by and encourage our customers to purchase a Jewelers Mutual policy for their engagement ring. Even though the ring would be insured for $14,000, Jewelers Mutual would not pay that. They would want to see an invoice for the replacement diamond, and the jeweler could only add the Jewelers Mutual prescribed markup on it. The couple receiving $14,000 lets them come out whole. Maybe the jeweler should sell them an additional diamond band to go with her engagement ring. Lab-grown diamonds have not hit bottom yet.

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