But How Much does the Gem Really Cost? The Illusion of Fixed Prices in a Bargain Culture

Does it ever seem to you that you can't make heads or tails of pricing in the gemstone trade? Do you try to buy on location and feel somewhere between confused and bamboozled by the back and forth over the cost of a simple gem? If that’s the case, then you might be trying to impose a fixed price system onto the bargain culture (or a flexible pricing culture, in short).

The fixed price system is a relatively recent phenomenon, and it is a result of the invention of mass manufacturing and the standardization of goods. The first fixed price shop was opened in 1852 in Paris, when a businessman named Aristide Boucicault created a unique shopping experience by opening his retail store, Bon Marche. His new system relied on three simple ideas: low markup, large volume, and clearly marked fixed prices. The old system with the goods behind the counter was eliminated, and the buyer could enter the store and browse without any obligation to buy. (This story is told by Richard Sennett in his influential book The Fall of Public Man, 1977 edition, p. 176)

When you, the retail buyer, enter a jewelry shop, go to a gem show or browse the web, you are engaging with a fixed price system. And from this, you might easily conclude that prices in the gem trade are like they are in a department store. But this is an illusion, created by the necessity of a simple interface between buyer and seller.

Department stores with fixed prices do not rely on experienced salesmanship or constant interaction between seller and buyer, whereas a barter culture presupposes this. In a fixed price culture, more goods can be sold in a shorter period of time. This and the mass production feature of the fixed price system make the selling process cheaper and faster, which is another reason why a lower markup on goods is possible than in a barter culture. A lot of traditional ‘in store’ logistics is eliminated in the fixed price system: The buyer browses on his own and chooses his goods, then goes to a counter prominently placed within or at the exit of the store for checkout. Sales staff are on the floor to answer simple questions about location of an item or price. The anonymous online checkout system in fact relies on a fixed price.

But the ‘department store’ configuration of gemstone selling in countries with a fixed price structure is an illusion that quickly vanishes once we enter the lynchpin that marks the major difference between the gem trade and the sales of standardized and mass produced goods.

You guessed it. Gems are neither mass produced nor are they standardized. Diamonds are to some degree standardized, and lab grown diamonds are very standardized, but that’s because both of these still have a mass manufacturing element that allows supply to exceed demand, and secondly, you have a fairly standardized product. A diamond is not quite the same as a doorknob, but there are recognized grading and sorting systems that approximate what happens in fixed price culture. Variations in prices are minimized as is witnessed by the semi-public pricing on the Rapaport Report.

Not so in the colored gem trade. The differences between gems of the same type, color, and even size is so vast that no standardized pricing is really possible. Each gem is unique, more unique than a hand woven carpet or a glass blown lamp in a Turkish bazaar, and far more unique than a dress off the rack. And in that way, an experienced buyer-reseller is necessary to evaluate each gem on its own merits to get an idea of what the gem should minimally fetch in the market. Smaller gems are sorted into reasonably matching parcels depending on availability (more matched parcels means larger availability of course), and then priced based on supply costs and overhead. Supply costs, in turn, will vary based on production speed, availability, geopolitical context of the mining etc.

But even more important than this, when a buyer-reseller acquires gems on location, he or she is dealing directly with sellers who expect to bargain. Overhead and other costs are of course among the consideration; but the price of the gem will also depend on a lot of other factors: volume of purchase, time taken to purchase, existing relationships between buyer and seller, expectations about rising or falling costs, knowledge about availability and supply. Buyer and seller expertise can also be a big factor, which is not present in the fixed price system where expertise will not lower or raise the purchase price. Buyers don’t have a say in other words. In fact, you could say that the buyer and seller transact more anonymously. That’s impossible in a bargain culture.

A parcel of gemstones may be bought at auction in Bangkok, Thailand, on the gem market in Nivitigala Sri Lanka, on in the Casa Esmeralda in Bogota, Colombia or in a tiny village in Tanzania. They may be bought individually, in small faceted parcels, or large uncut and mixed quality volume. The bargain culture that forms the basis of these purchases, however, will be the same.

Another missing foundation for a fixed price market in the gem trade is that for the finer quality goods, demand exceeds supply. A fixed and large supply decreases price volatility. And the more price volatility, the harder it is to impose a fixed price.

Consider how the current gold market affects retail pricing of jewelry (the gold market is not subject to bargaining but the commodities price fluctuates swiftly). Currently the gold market price is extremely volatile, going mostly up but also changing vastly in a single day. This messes up all the pricing on all retail websites – curbed only by the fact that what is being sold are finished goods and these have a set manufacturing price. Custom goods (and this includes a customized kitchen just as much as a custom wedding dress) will change and in a volatile market this can mean that the final price is not what the buyer expected to pay. Prices can change during the process of manufacture, if they are very volatile.

And where does that leave the retail buyer when it comes to the evaluation of the prices he or she is faced with? In a fixed price culture, they will have to assume that the work of pricing has already been done, and that the price was based on manufacturing and overhead costs. In a bargain culture, the responsibility of pricing lies with the seller and buyer. It requires direct interaction between the trading entities and the pricing is the result of a process.

The purchase is expected to be the outcome of the bargaining if the bargaining was successful – meaning a price was agreed upon. In other words, a faux pas is to bargain, get a price, and then “think about it till tomorrow”. Because by “tomorrow” the price achieved by bargaining yesterday will have been withdrawn, and if the seller was offended that there was no deal, it will be higher than the day before. Too much precious negotiating time was wasted, and that may translate into a higher purchasing price on the next day. In the worst case scenario, you will be given a ridiculous price or be refused a sale.

Next time: the secret sauce to win as a buyer in the bargain culture.