A key breakthrough I really grokked during one of my many silent strategy meditation retreats is that strategy is all about alignment – especially once you fully wrap your head around your goal, your resources, and the competitive landscape. Alignment is what gives systems that 1 + 1 = 3 result and misalignment can bring systems to their knees.
A strategy is a set of well-aligned activities with the aim of occupying a valuable position within a competitive landscape.
For example, synchronous rowing has been proven to be 8% faster than non-synchronous rowing. Further, when oars tangle – which can only happen during asynchronous rowing – someone is usually going for a swim. So if your goal is to win a race, then you should row synchronously.
The classic corporate example of great strategic alignment is Southwest Airlines. Growing up in Dallas, Southwest’s headquarters and home-base, I had a front row seat to the company’s incredible growth into its current position as the largest domestic air carrier in the US (by passengers boarded). Over the past 5 decades, Southwest has delivered tens of billions in value to customers, employees, and shareholders. Remarkably, the company has been profitable for 46 consecutive years – which is completely unheard of in the airline industry.
BTW, even if you don’t care for Southwest as a customer, the lessons from this company – especially around alignment – are quintessential for developing your own strategies.
What’s the Goal?
Before digging into the alignment between Southwest’s activities, we need to know their objective. Southwest’s vision is “to become the world’s most loved, most flown, and most profitable airline.” I’m assuming that they have clear internal definitions and KPIs for most loved and most flown.
Southwest Airlines’ Activity Map
Now we can dig into their specific activities. This is obviously an incomplete list fo their activities, but it’s a starting place to illustrate the importance of alignment.
As you can see visually, most of their activities reinforce one or several other activities, resulting in very high alignment.
Alignment Isn’t Risk-Free
Southwest’s strategy is not, however, without its risks. For example, Boeing is Southwest’s sole supplier for aircraft and many parts. The March 10 crash of a 737 MAX 8 in Ethiopia (the second crash in 6 months of that model) and the subsequent grounding of the entire MAX 8 fleet worldwide is clear evidence of the risks of overly-tight alignment. Neither crash was a Southwest flight.
Fortunately, Southwest only owned 31 MAX 8s as of Jan 1, 2019 (of a total fleet of 750). But grounding 4% of your fleet is a big deal and Southwest is due to buy or acquire another 37 MAX 8s in 2019 and over 200 MAX 8s over the next 8 years. I’m confident that Southwest will survive the 737 MAX 8 issue relatively unscathed, but the unfortunate events are a clear reminder that even brilliant strategies like Southwest’s are neither permanent nor invincible.
A good strategy is inherently well-aligned. Good alignment is the best way to deliver disproportionate value and results (1 + 1 = 3). Poor alignment usually means that some parts of a system are destroying value that was created elsewhere.
Tradeoffs are inevitable, but should be deliberate. For example, Southwest chooses to invest heavily in its employees and in ways to reduce fuel costs. A myopic focus on cutting costs would be a huge mistake long-term.
While there may be many ways to win, just choose one. Southwest ignores the high-end travel market and focuses on a low cost strategy. The company knows exactly what it is and what it isn’t. And, just as important, they’re disciplined about it. Focus and consistency have the additional benefit of carving out a clear brand in customer’s minds over time.
Cut activities that don’t fit (49 services Google has killed, some of which they acquired at great cost) and double down on activities that do fit. YouTube, Android, Google Home, Maps, and Chrome may feel like expensive & unprofitable distractions on the surface, but they actually fit very tightly with Google’s/Alphabet’s core strengths: organizing the world’s data, powerful search, and monetizing intent via advertising.
Remember: you have to be crystal clear on your objective before you even begin to worry about what activities to perform or not.
Herb Kelleher, Southwest’s Heart
This short podcast with Herb Kelleher, the co-founder and former CEO of Southwest, is a must-listen. Herb was a living legend until he passed away early this year. I was deeply saddened by Herb’s passing but I promise you’ll laugh out loud if you check it out.
Also, Southwest Magazine did a nice job with an extended article about Herb’s life. The opening story is classic Herb.
Concept: Hidden Competition
One last thing.. writing this piece made me think about a cool concept: Hidden Competition.
When Southwest first started flying in 1971, they weren’t really competing with the major interstate airlines, whose customers were mostly businessmen with expense accounts. Southwest’s quick flights between Dallas, Houston, and San Antonio were actually competing with Greyhound and other surface travel options. For Greyhound, Southwest represented hidden competition and was a key reason Greyhound is only a fraction of its former self and filed for bankruptcy in 1990.
I still think self-control is a very valuable trait – even if it’s not as predictive as once thought…
A team of psychologists have repeated the famous marshmallow experiment and found the original test to be flawed. It joins the ranks of many psychology experiments that cannot be repeated, which presents a considerable problem for its findings.
DIY toy taxidermy shop Build-A-Bear had decreed that Thursday, July 12, was Pay Your Age Day in shops across the U.S., Canada, and the U.K. The self-explanatory event lets bear lovers make a furry friend, stuff it with love, and pay a dollar amount that matched their current age—a payment model that vastly favored spoiled 1-year-old knee-biters over 50-year-olds who just needed something to love.
The 21 year old company was likely planning on leveraging nostalgia from grandparents and parents while building loyalty with a new generation of toy-lovers. Now was an especially great time for this campaign as Toys”R”Us has shut down hundreds of stores worldwide and there’s marketshare on the table to capture – especially for a focused, experiential brand like Build-A-Bear.
It was a good plan and a great marketing idea, save for one tiny little problem—the fans loved it too much. In fact, they loved it so much that they started lining up before Build-A-Bear Workshops opened in the U.S. The long lines made the company nervous about crowds and maybe bear riots, so they sent out a statement on social media saying it would limit the number of people who could take advantage of the deal due to safety concerns.
Customers were pissed – especially those who lined up around the block. Plus no one wants to hear you make excuses, blaming “safety concerns” and “local authorities.”
Sadly, all Build-A-Bear had to do was test this genius, goodwill generating campaign at a single store and then in increasingly larger markets to work out the kinks. To make matters worse, Build-A-Bear didn’t jump on the bad press and make anything of it.
Takeaway: Launch slowly – even if you have a great idea – so that any mistakes in your plan or missed assumptions don’t spiral out of control.
It’s one thing to be obsessed with our looks, our beauty…
As the demands of beauty rise, not only do we have to do more all the time, but their nature also changes. Beauty becomes more important. It has begun to function as an ethical ideal. Beauty is often what we — rightly or wrongly — value most. It is what we think about, talk about and what we spend our time and hard-earned cash on. If we are good at beauty, we feel we are good, virtuous; if we are bad, we feel we are no good, almost no matter what else we do. We judge others too on how they look. We make assumptions about what people are like and how successful they are. We read character traits directly from looks, and we start doing this as young as four years old.
Consumers are allowing themselves to be manipulated by obvious marketing tactics and the beauty industry is capitalizing on the opportunity. These marketing and advertising tactics remind me of the diamond industry, which I’ve written extensively about.
Let’s take hair for instance. “Shaving, plucking, waxing and lasering” have become so normalized that hair removal is no longer a “beauty practice” but has been “redefined as a hygiene practice, as part of so-called “routine” maintenance.” And these redefined social norms aren’t just for celebrities – they’re for everyone.
Hair removal becomes something we have to do, a requirement. It is not an option to refuse — like teeth-cleaning, but without any of the health benefits. Beauty practices are indulgent and optional; hygiene practices are necessary and required. You don’t have to do a beauty practice; you do have to do something that is required to meet minimum standards, just to be normal. Once the shift to routine is complete, the fact that this is a demanding beauty practice becomes invisible.
The Beauty Market
The Economist reported in 2003 (Real Men Get Waxed) that the US male grooming market was $8 billion. 15 years later, that number has nearly tripled and is on pace to grow by 12% annually.
Bottom Line: Societal norms and their changes drive huge shifts in spending – especially when there’s strong emotional connection or potential for embarrassment. What shifting & emotionally-charged norms can you capitalize on?
Niche Positioning with Puddles Pity Party. Hit play.
That is Puddles Pity Party – a one man cover band. Puddles has nearly 400,000 followers on YouTube, many 20+ million view videos, 140,000 monthly listeners on Spotify, and he performs all around the world. Just last week he sold out the Palace of Fine Art Theatre, a 962 seat venue in San Francisco. Puddles was also an America’s Got Talent quarterfinalist in 2017.
How on earth did this happen? And how can you replicate Puddles’ odd but tremendous success?
This post will dissect how Puddles has positioned himself over time and identify lessons that might be applicable to your endeavors.
And that’s why during Puddles’ America’s Got Talent audition the judges had such high praise for his performance. Heidi Klum commented, “very unexpected, very original, very different, and I want to see more.” Even Simon Cowell had nice things to say.
Some call Puddles’ performance a gimmick. And yes, the juxtaposition is remarkable: a sad, mute clown who sings so beautifully that you can’t help but smile. But what may have started as a gimmick has turned into millions of people (and maybe you) falling in love with a fantastic performer and supporting his art.
Puddles differentiated himself so that he could stand out. Ironically, in order to be heard Puddles chooses to not speak, making his singing voice come off that much louder by further exaggerating the juxtaposition.
Hit play below and keep reading. This song should take you to the end of this article – just another 4 minutes.
Puddles wasn’t born Puddles.
Puddles Pity Party is Mike Geier – the 54 year old 6’ 8” baritone. He’s obviously a talented vocalist but that’s not enough to succeed these days.
While entertaining, Geier’s performance isn’t unique. Geier hadn’t found his niche yet. So he kept experimenting – searching for what clicked with audiences.
Geier experimented with a lot of personas. He was Big Mike, Kingsized, Greasepaint, part of the Swing Noir band called the Useless Playboys, and a part of many other acts and groups along the way.
From what I can tell, Puddles was a minor character in Geier’s repertoire for a long time before taking center stage. YouTube videos from 2009 and 2010 feature Puddles, but not our 2018 Puddles. Those videos feature a “missing link” Puddles, bridging a gap between Geier and the Puddles we know today.
Puddles’ evolution seemed to accelerate when Geier was performing at a cabaret in Seattle called Teatro ZinZanni. Geier could experiment in front of an audience every night and continuously make small improvements.
Tight and frequent feedback loops are undervalued. When done properly, tight and frequent feedback loops force you to 1) put your work out there, 2) listen to your audience’s response, and 3) to try new things in order to improve.
The problem, of course, with tight and frequent feedback loops is that you have to put your work out there, listen, and try new things – which requires a lot of motivation, time, energy, and persistance.
When you’re just beginning, it’s important to start narrow – to do one thing well. You’ll get increasingly better at whatever it is you’re doing. But you also have to experiment and try new things.
To find the right niche, you may have to search and search and search. Hard work and persistence may pay off: You might discover your niche, your product-market fit, and become a ten-year “overnight” success like Puddles.
One obvious challenge here is balancing focus with experimentation. I think the best remedy is to be intentional – maybe even scientific – with your experiments. A “pivot” is holding most variables constant while changing others. Plant one foot while you find a better position for the other.
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The Anatomically Modern Puddles
A 2012 interview with Geier hints at a nearly modern Puddles. All of the Pagliacci hallmarks were there – white face paint with red accents and the baggy clown suit. But we also see Puddles’ trademark “P” crown and his operatic singing style.
So we have some understanding of Puddles ancestry, but what makes a good niche?
Seek a Niche that’s Worthwhile
People want to be entertained. Puddles delivers because Geier understands entertainment. He understands fans, culture, originality, comedy, presence, and performance. And he studied and emulated one of the greats – Elvis – for years.
But your niche can’t just be worthwhile to your future customers. In order to compete long term, your niche has to be worthwhile to you too – financially and artistically.
Niching down sends a signal to your customers that you’re dedicated to a specific thing that they care deeply about.
Go after a market that’s under-served. Your market will be thrilled that someone is finally paying attention to them and reward you with their time, attention, and money.
Going after an under-served market lets you deliver disproportionate value immediately. When you over-deliver, your fans will be evangelical, bringing others into the fold and reducing your customer acquisition costs.
Seek a Niche that’s Defensible
There’s no lack of great singers out there – in fact it’s a competitive, cut-throat market for up-start singers. Supply is much greater than demand for talented vocalists. That’s the core reason why Geier didn’t have Puddles-level success as Big Mike, Kingsized, Greasepaint, or the Useless Playboys.
But as Puddles, Geier is in a category of his own – a great position to defend from competition.
I dare you to copy Puddles. You will fail. You’ll fail because blatantly copying his ideas will make you look ridiculous. You can never be an exact clone of Puddles anyway because he’ll always be the original and you’ll always be the copy.
When considering a niche, think about defensibility. There are many ways to defend your position in a competitive landscape. Ideally, one feature of your position would be an element of self-defensibility.
When you’re starting something new, seek out a niche – a niche that’s remarkable, worthwhile, under-served, and defensible. Experiment and iterate, holding on to what works and leaving behind what doesn’t. Once you find a valuable position in your competitive landscape, ruthlessly exploit it, cautiously grow it, and begin to invest in your next move. Land and expand.
I agree with Simon Cowell. I think Puddles is “fantastically brilliant” and I think his strategy for finding and owning a niche has been a success that will continue to pay off for Geier, his team, and his fans.
PS: If you have another 4 minutes, I’ll leave you with one final video from 2014 (Dancing Queen by ABBA). I want you to note how many people are recording him in this tiny coffee shop in 2014. Puddles is safe, fun, and worthwhile – the formula for sharability – a concept I lifted straight from Ryan Holiday’s Perennial Seller.
Why don’t we learn from past experiences when it comes to planning new projects? Why aren’t even our best laid plans realistic?
Surely you’ve noticed this – whether it’s getting your taxes done, that big presentation for work, or planning your wedding.
Why do 80-90% of mega projects run over budget and over schedule?
Why has it taken – for example – nearly 100 years to expand the Second Avenue Subway in NYC? The original project was expected to cost 1.4 billion dollars (a 1929 estimate in 2017 dollars) and now with Phase 1 completed ($4.5 billion to build just 3 of the 16 proposed stations), Phase 2 is expected to cost $6 billion.
Why do we fall for The Planning Fallacy again and again?
When planning a project we naturally focus on the case at hand, building a simulation in our minds. But our simulations are rosy, idealized, and don’t account for all of the complexities that will inevitably unfold.
We also focus on succeeding, not failing, creating an optimism bias. This means we don’t think enough about all the things that can go wrong.
We’re overly confident, believing in our abilities and the old “this time will be different“ line too much.
We ignore the complexity of integrating all of the parts of a project together.
We intentionally misrepresent a project’s plans in order to get it approved.
We rely too heavily on our subjective judgement instead of the facts and past empirical data.
And of course: incompetence, fraud, deliberate deception, cheating, stealing, and politicking.
Use past projects – even if they’re not exactly comparable – as a benchmark for projects being planned.
Track and score the difference between forecasts and outcomes.
Get stakeholders to put skin in the game, creating rewards and penalties for good and bad performance. #IncentivesMatter.
Use data and algorithms to reduce human biases.
Use good tools to help you focus. Asana co-founder Justin Rosenstein warns against “continuous partial attention” – a state of never fully focusing on any one thing.
Success Building Software
I build projects for a living – mostly product strategy and software for start-ups or innovation groups within larger companies. I plan and execute on projects everyday and I still struggle with the planning fallacy in other areas of my business (did I mention my corporate taxes are due in 7 days?).
But the secret sauce to my successes building products has always been to 1) have personal expertise in what’s being planned and built, 2) refine and go over the plans until your eye bleed looking for possible pitfalls, and 3) have a clear and easy-to-follow process to keep you focused on the right thing at the right time.
Terms & Concepts
The Planning Fallacy – Poorly estimating the timeline, quality, and budget of a planned project while knowing that similar projects have taken longer, cost more, or had sub-par results.
The Optimism Bias – Focusing on the positives of a situation over the negatives.
Overconfidence – Thinking that we’ll perform better than we actually will.
Coordination Neglect – Failing to account for how difficult it is to coordinate efforts and combine all of the individual outputs into one complete system.
Procrastination – Choosing to do things that we enjoy in the short term instead of the things we think will make us better further down the road. In the episode, Katherine Milkman called procrastination a “self-control failure” – my new favorite phrase.
Reference Class Forecasting – Using past and similar projects as a benchmark for how your next project will perform.
Strategic Misrepresentation – Underestimating the costs and over representing the benefits of a project.
Algorithm Aversion – The big thing that Katy Milkman thinks is holding us back from using “data instead of human judgement to make forecasts” better.
There are a lot of great reasons not to buy a diamond so this article assumes that you’ve already decided to buy a diamond and are looking for the appropriate strategy for making the right purchase. What follows is the result of many dozens of hours of research that I did for my fiancée’s engagement ring. So while this content is catered to diamond engagement rings, the advice is applicable to loose diamonds, earrings, and necklaces as well.
The objective is simple: Purchase the best-value diamond within your budget.
But our strategy – a well-aligned set of activities that result in a valuable position within a competitive landscape – is less straightforward.
In this case, we’re competing against the diamond industry as a whole and diamond retailers specifically. Buying a diamond is also competing with all of the other things that consume your time, energy, and brainspace. The position that you want to occupy when you’re ready to purchase is unemotional, well-educated, outcome-focused, patient, confident, and prepared to make tradeoffs.
If you just want to get something to put on your fiancée’s finger and don’t care about value or cost, then employ the same strategy that most guys do: Ask your future sisters-in-law or mother-in-law to guess about “what she likes.” Then ask your guy friend who was most recently engaged where he got his ring. Go to his recommended jeweler with a budget in mind and do your best not to spend twice as much as you’d hoped. You’ll have the ring within a few days so you can pop the question and you can have it properly sized to her finger a few weeks later. This is a solid strategy for checking all the boxes, especially if you don’t want to invest the time and energy to get something high value.
However, if you want to understand my strategy for getting a high-value diamond within your budget, keep reading.
Make Smart Choices
Because diamonds are so expensive, buying the right one is a decision worth taking seriously. It’s important to choose to make the most rational decision you can now, before you face the enormous emotional, marketing, and societal forces that you’re about to encounter. It’s critical to understand how the cards are stacked against you so that you can put yourself in the best position to achieve our objective.
Emotional Decision Making
Think about a large & important financial decision you’ve only made once or twice in your life – where to go to college, which job to take, which car to buy, which apartment to rent, or which house to buy. Now imagine complicating that decision by coupling it to a second enormously emotional decision: whether to spend the rest of your life with someone or not.
That is the emotional state most people have when they walk into their local jeweler, and it’s why so many people get ripped off buying diamond engagement rings. If your only criteria for buying a diamond is the love in your heart, then you will likely buy something you can’t afford and isn’t very spectacular.
Emotions are a critical part of the decision-making process. In fact, people who have had the emotional centers of their brains removed or damaged struggle to make straightforward decisions like what to have for lunch.
So my advice is to be objective and rational where you can be (diamond X is objectively better than diamond Y) and do your best everywhere else to make decisions you won’t regret (especially regarding budget).
Overcoming Marketing Half-truths
You’re not going to be able to escape a century of diamond propaganda but you can acknowledge that nearly everything you know about diamonds was probably told to you by the very people who sell diamonds – people who want your money more than they want their diamonds.
Diamonds Are Forever
Advertising Age called the 1948 “Diamonds are Forever” marketing campaign the greatest marketing campaign of the 20th century.
The De Beers company (and cartel) has had brilliant marketing like this for nearly a century, and the very fact that you’re even considering a diamond engagement ring is proof. Diamond engagement rings weren’t popular until the 1930s, and the primary success of their marketing campaigns is rooted in convincing women that men don’t love them unless they buy them a big diamond ring. Entangling love and diamonds encourages emotional decision making, which makes the diamond industry more money.
Oh, and diamonds are definitely not forever – In reality they’re quite brittle and easy to lose.
This excellent video humorously paints the picture of “why engagement rings are a scam …but you’ll still end up buying one.”
The 4 Cs (That Jewelers Want You To Ask About)
We’ll talk extensively about the famous “4 Cs” – Cut, Clarity, Color, and Carat – but you need to know up front that the 4 Cs are a marketing meme created to help sell more diamonds. By getting just a little education about diamonds (from the diamond industry), people feel empowered to make a great decision. The 4 Cs were also a way to improve the sales of smaller diamonds since jewelers could highlight other features aside from the mass and size of their diamonds. It’s genius and it’s made the industry countless billions of dollars.
The “5th C” when evaluating a diamond is cost. But how much should you spend on a diamond engagement ring? Don’t worry, diamond advertisers have the perfect answer for you: 2 months salary. Or was it 3? Surely your love for her is worth at least a few months of your income – I mean, you are going to spend the rest of your lives together.
The marketing and advertising history of diamonds is fascinating and would make an excellent case study for me to do. If you’re curious, learn more here:
Of course, focusing exclusively on the cost of the diamond is the wrong answer anyway. It’s better to set a budget for the entire ring and then figure out how you want to allocate that between the different components of the finished product.
The easiest way to spend more money than you want to on an engagement ring is to not have a budget. Before you even look at diamonds, you must set an initial budget. That means you’re going to have to sit down and look at your finances and make a decision about what you can afford and what you’d like to spend.
I recommend picking a number you’re not willing to spend more than and then subtracting 20% from that number to create a range. Make it clear to anyone you talk to about budget that you are not willing to go even 1 penny over that upper number – all in. And don’t forget about the cost of the ring, any fees associated with setting stones, taxes, any sort of customs fees if that’s applicable, and annual insurance. It’s also okay to spend less than your range – something that might happen if you take the time to do your homework.
But how do you pick an amount? All I can offer you is a few tips and things to think about:
There is no formula and anyone that has one is probably trying to sell you something.
A diamond ring is a luxury purchase and should only be made if you have the disposable income to afford it.
Generally speaking, going into debt to buy a luxury good is a horrible decision.
Diamonds are a terrible investment so don’t even think about the resale value (which, FYI, will definitely be less than 70% of whatever you pay).
The cost or size of the diamond does not represent how much you love someone.
How much is too much? How much would cripple your joint finances? You should probably spend way less than that.
If you’re buying an engagement ring, remember that you’re planning to spend the rest of your lives together. You’re going to have plenty of opportunities in the future to buy her jewelry or even upgrade her ring.
Will she wear the ring everyday? If not, then you might decide to spend less money since she’ll be getting less value from the ring. This is a conversation I’d have explicitly with your fiancée.
Try to translate the expense into the terms of another luxury good. What else might you spend this money on? For example, how many days of your favorite vacation might a ring be equivalent to? What would that cost?
How much is too little? That number may be $0, but you may also feel good about making a financial sacrifice as a symbol of your love.
If you’re worried that you are budgeting too much, then you probably are.
Once you pick a total number, write it down or tell a friend. Having someone else to hold your future self accountable to the decision your current self is trying to make responsibly can relieve a ton of stress down the line.
What Really Matters
Imagine yourself 5 or 10 years into the future and look back on the moment that you’re currently in. What’s going to really matter to you and your fiancée when you think back? Will it be how much you spent? How big the diamond is? The exact details of how you asked her?
I know it’s not as romantic and not as big of a surprise, but if you can both go get educated together and have a few frank and open conversations about an engagement ring, you’re much more likely to get a ring you’ll both happy with long term. After doing some research together you may even find out that you don’t want a diamond at all – which will save you a ton of money and anxiety.
I asked my fiancée to marry me fairly spontaneously in the middle of a crazy art and music festival in the high deserts of Nevada (Burning Man), so I hadn’t purchased a ring yet. We just used another ring she was already wearing while I got my act together and bought her engagement ring.
As a result, we were able to take a few weeks, get educated, visit a jeweler, and I bought a diamond ring that we both love. And it was another big surprise when I gave her the ring.
It’s ok to feel resistance about the idea of proposing without a ring – it’s exactly what we’ve been told to feel. But also know that involving your fiancée is an option too and that whether the whole thing is a huge surprise or you’ve tried on some rings together, all these scenarios have their own tradeoffs and sacrifices.
At the end of the day, this is about the two of you, not anyone else. So do it your way.
Like most industries I study, one of the very first things I learned about the diamond industry was how much there was to learn – about the industry, it’s history, and diamonds themselves. Things are further complicated by the fact that no two diamonds are exactly the same – they’re all technically unique. And while their unique status doesn’t necessarily increase or decrease their value (oranges and snowflakes are all unique too), it does complicate the process of assessing and comparing diamonds and their prices.
There are a lot of relevant variables for diamonds. In addition to cut, clarity, color, & carat (“the 4 Cs”), there’s certification, and shape, which is often confused with cut. And then there’s the ring itself – the material, color, and design of the setting. I cover all of these, and more, in detail in another piece so that we can remain focused on strategy here.
The point is that there’s a lot to consider when purchasing a diamond and if you don’t have a solid understanding of what gives a diamond value, then you’re almost certainly going to get a bad deal.
Buying a Low-value Diamond
If you’re buying a diamond for an engagement ring, then you probably value things like the meaning it has as a symbol of your commitment to one another and the signal it sends to your families, friends, and broader community. It’s also usually a gift, which carries value in itself. An engagement ring might also represent a sacrifice one person is making – a display of disposable income. The value of these things is primarily dependent on the person.
But there’s one thing that almost all people value about diamonds: their beauty. And a diamond’s beauty is entirely created by the quality and quantity of light leaving the diamond and hitting our eyes.
Fortunately for us, the beauty of a diamond is fairly objective once you leave the carefully crafted lighting environment of the jewelry store.
Many diamonds are objectively bad. Dull, yellow, and obviously flawed diamonds are not very pretty but they’re still expensive – low value, high cost. These are the worst diamonds you can buy but they’re also the easiest to buy. Usually, these diamonds are objectively bad because they are cut to minimize the waste when cutting the rough diamond and so major sacrifices are made to the geometry of the diamond.
Cut geometry is the worst place to cut corners for high quality brilliant diamonds that look great outside of the hundred thousand dollar light system of the showroom floor. Rough diamonds aren’t interesting at all to look at. It’s only once they’ve been cut and polished that diamonds look gorgeous. While cutting them in optically non-ideal ways may mean that there’s more diamond to sell, there’s not necessarily more that can be seen once the diamond has been set.
The other piece of good news is that there’s a limit to what the human eye can and can’t see and that threshold can be partially defined in terms of certain variables. Buying diamonds with features that are substantially above those visible thresholds is a waste of money.
So, going back to our objective – to help you purchase the best-value diamond within your budget – we want to find diamonds that are just barely above the thresholds that make them as pretty to our eyes as possible.
In the 2nd part of this article, I detail guidelines for what and where the thresholds are for each of the key variables that make diamonds visually attractive – so we can spend our limited budget on the features we can actually see and enjoy.
Buying the Wrong Diamond for You
While some diamonds are objectively bad because of certain variables, other variables are more a matter of personal preference.
The ring’s style, setting, and color are all areas where you’ll want to understand your fiancée’s preferences. In addition to knowing the ring’s characteristics – which may affect what diamond you’ll get – you’ll want to know what shape diamond your future-fiancée wants.
To do this, I highly recommend taking your future fiancée to go try on rings together at a high-end retailer. Not only will you have the perfect opportunity to get her ring size accurately measured but you’ll also get to see a lot of styles, shapes, and sizes side by side.
And, of course, you might avoid buying the worst diamond that you could possibly buy: the diamond that you didn’t need to buy.
Information Asymmetry Disadvantage
Information asymmetry is an economic concept where one party in a transaction has more or better information than the other. Let’s say that Schmartha Fluert, the famous television personality and homemaker, finds out that the Food and Drug Administration (FDA) is going to announce tomorrow that a biopharmaceutical company, KloneCo, is not going to have their new drug approved for public use. If Schmartha Fluert were to attempt to sell her shares of KloneCo before the FDA made this information available to anyone else, the Securities and Exchange Commission (SEC) might call this “insider trading.” I would call it an excellent (and purely hypothetical) example of information asymmetry because the seller, Schmartha, has important information that buyers don’t have.
While buying a diamond from a jeweler is similar to buying Schmartha’s KloneCo shares, there are 2 main differences: 1) There are laws against what Schmartha allegedly did and 2) Schmartha’s information was truly a secret while information about the diamonds you’re considering is much more knowable. That means that while you’re not really protected from shady diamonds retailers (“buyer beware”), you can educate yourself so that you can avoid bad deals.
Finally, buying an engagement ring is not something you do every day. But selling engagement rings is something that jewelers do every day. You are at an inherent disadvantage in the jewelry buyer-seller relationship – both in terms of the information you have and the experience you have at the bargaining table.
The follow-up to this article and the additional resources I’ve put together contain the minimum information you need to help overcome this information asymmetry.
Beware False Confidence
But don’t get over-confident. No matter how much you research, you’ll probably never have more expertise or knowledge than the seller. Worse yet, once you’ve learned a little about diamonds and rings (usually the basics of the “4 Cs” from your local, overpriced jeweler), it’s easy to fool yourself into thinking you know enough to make an educated decision.
So arm yourself with as much information as you can, don’t be afraid to go to retailers multiple times to extract knowledge and prices from them. Just be sure not to be seduced by your jeweler, who will work their hardest to make you like and trust them.
Beware of Diamond Decision Fatigue
Decision fatigue “refers to the deteriorating quality of decisions made by an individual after a long session of decision making.”
Because of the overwhelming volume of novel information that’s going to be thrown at you and the number of decisions you’ll be asked to make when selecting a diamond, “Diamond Decision Fatigue” can leave you open to being manipulated into buying something you don’t understand or want.
Purchasing a diamond isn’t meant to be easy. But avoid the temptation to simply trust whatever jeweler is in front of you when you’re most exhausted. So when you find yourself suffering from Diamond Decision Fatigue and don’t want to get ripped off: stop and take a break.
Buy from the Correct Retailer
There are only a handful of places to buy diamonds: low-end jewelers, high-end jewelers, estate sales, antique stores, resale marketplaces, online, and – of course – your “friend’s buddy” who will give you the “best deal” in town.
While every diamond is technically unique, diamonds are commodities. The vast majority of diamonds are also fungible, or nearly fungible. An item is fungible if it’s units are interchangeable. Pure gold, for example, is fungible. 1 gram of gold in a Swiss vault is interchangeable with a gram in Ft. Knox. Money is also fungible. Your $10 bill is completely interchangeable with 2 of my $5 bills. Once gasoline has been certified to be of a certain grade, it’s fungible too.
While diamonds aren’t exactly fungible, most diamonds are more-or-less interchangeable. Some rare diamonds, like the most famous diamond in the world – the Hope Diamond – are definitely not fungible. Not only is the diamond exceptionally rare because of it’s unique blue color and enormous size (although there are at least 2 cuts diamonds that are 10 times more massive), it’s history makes it irreplaceable.
But since you’re not in the situation to buy an irreplaceable diamond, you can rest assured that any diamond you buy could be interchanged with another similar diamond.
We’re going to use these facts – that diamonds are both unique but semi-fungible – to our advantage.
Whether we’re talking about diamonds, beer, or mattresses, the more middlemen who stand between the manufacturer and the end customer, the more markup a product will have. These middlemen all need to make a profit and you and I are the ones who foot the bill. That’s why companies like Casper are popping up to sell amazing mattresses directly to customers – disrupting the expensive, inefficient, and capital intensive retail showroom distribution channel.
Unfortunately for beer lovers like myself, prohibition-era (late 1920s) laws require that brewers and distillers sell their product to distributors, who mark up the product while adding little or no value, and then sell it to retailers, who then mark it up again and sell it to you and me.
The exact same thing is true for diamonds – the more middlemen there are, the more expensive the end product is going to be for you and me. But, unlike the alcohol industry, there aren’t any laws requiring distributors in the supply chain.
So if you’re looking for to buy a high-value diamond for as little money as possible, one of the best things you can do is to get educated and purchase from one of the reputable online retailers. These online retailers can make a healthy profit while charging you substantially less than brick and mortar jeweler – just like the online mattress companies. And because they don’t have to hire pushy salesmen to stand in their fancy stores, you don’t have to deal with gross sales tactics either.
I want to share one final thing about this entire process that was a surprise for me: I’ve spent dozens of hours doing the initial research, making a purchase, and then researching and writing and publishing about 10,000 words of content. I’ve looked at hundreds of diamonds in person and online – with my naked eye, at 10x, 20x, and even 60x. I understand the structure of the diamond industry, it’s disgusting little corners, and gross history. I understand the economics and I understand that the diamond I bought isn’t unique in any meaningful way.
Once I started getting deep into this process, I got worried that I was going to become totally jaded about diamonds.
But after all that, whenever I think about or see my fiancée’s ring, it really does feel like that little polished clear stone has something magical about it. I know this is just my brain tricking itself – because I’m the one who knows exactly how to find 15 diamonds exactly like it. But it’s a trick I’m happy to fall for – especially since I was able to have the discipline not to fall for it during the buying process. Even though we value the beauty of our diamond, ultimately, it’s the symbol and meaning behind the ring that’s really special to my fiancée and me. And if her ring ends up taking on some of our love for one another, I’m okay with that.
Bottom Line: The strategy for buying a diamond (engagement ring) is:
Commit to making a good decision
Understand the value of diamonds generally and their value to you specifically
Dramatically reduce your information asymmetry disadvantage by doing your homework