The other day my daughters were looking at my wife's engagement ring and this opened an interesting conversation about diamonds. We were discussing why diamonds are so expensive.
In this blog, I share how I used diamonds to talk to my daughters about Scarcity, Signalling and great Marketing. All these topics can impact how and why people spend so much of their money (not just on diamonds).
3 Reasons Why Diamonds Are So Expensive
Reason 1: Limited amount of diamonds (Scarcity)
When diamonds were first discovered in South Africa, they were seen as a thing of beauty. However, as there were not many found at that time and it took a lot of effort to find diamonds, people were willing to pay a lot of money for them.
This was a really interesting conversation with my daughters as we were talking about scarcity and why people are willing to pay a lot of money for something they believe is limited.
I explained that if we could find diamonds in most gardens, no one would be willing to pay lots of money for them as they wouldn't be seen as special/limited.
It’s the same reason paintings by famous artists and old wines cost so much. They are hard to replace as there aren’t many of them.
The interesting thing about diamonds is that they aren't as rare as most people believe. They are being found in many different places around the world. However, the diamond companies are keen to ensure that the perception doesn't change and people continue to believe they are rare. They do this by keeping many of the diamonds they find in large and secure safes rather than selling them.
They only put a limited amount of diamonds out for sale each year. This limited supply means they can charge higher prices. A nice economics lesson there!
In addition to keeping diamonds in safes, diamond companies did some clever marketing to ensure that diamonds appear more scarce than they really are. I’ll explain more about that below.
Reason 2: People like to show off their diamonds (Signalling)
We know that many people spend money to show off their wealth to others. This is why some people buy fancy (and often impractical) sports cars or big houses with rooms they never use. They want to signal they have money and that they are successful.
Diamonds are one of the best ways for people to show people that they are RICH. Wearing a big diamond is a sign of wealth. Everyone can see it and say “Look at that ring, they must have a lot of money to afford that!”
As diamonds are also gifted to others, the gifter is also using diamonds to signal to others. If a husband buys his wife a diamond necklace, he is signalling both “I have lots of money” and “Look how generous I am!”.
This demand for diamonds by those who want to show off their wealth has driven up the price over decades. As more people become rich, the more demand there is for diamonds and the price will continue to increase (although there are some reasons why that might change in future - I'll explain more about that at the end of this blog).
Reason 3: Amazing Marketing
I’ve written about how learning to sell is a skill I want my daughters to embrace as they grow up. To do this I like to share clever ways people and companies get people to spend their money.
Diamond companies came up with two of the best marketing strategies ever!
Diamonds Are Forever! 💎
The diamond companies worked with Hollywood to ensure that diamonds are something you keep forever. There was even a James Bond movie called 'Diamonds Are Forever' with a catchy theme song by the same name.
This is super clever as it means people rarely sell their diamonds. As people don't sell their diamonds it keeps the amount of diamonds on sale low and keeps the price high, i.e., keeps them scarce.
If it was the norm to sell diamonds after a few years of not wearing them, there would be a lot of amazing diamonds for sale and this would lower the price.
Diamonds And Love! 💘
The other way in which the diamond companies worked with Hollywood was to help market diamonds as being a sign of love. This is why most people give their partner a diamond engagement ring when they propose to them.
The clever connection between Diamonds and Love means that we all become illogical when buying diamonds.
In fact, the diamond company's marketing team convinced people that most people spend 2 months of their salary when buying an engagement ring as a sign of their love.
Even if you could buy an identical diamond second-hand, most people won't do that when buying an engagement ring as it is seen as unloving or cheap. This is illogical as diamonds are so strong that they don't change over time so a new vs second hand wouldn't be any different, except for the emotional attachments.
Also, few people would want a secondhand engagement ring as they would believe that the ring was a bad omen as the first marriage didn't last.
I loved sharing this last point with my daughters. As I'm keen for them to learn about selling as they grow up, one of the most powerful selling tips is to use emotions. People don't just use their brains when buying something, they also use their hearts. A great salesperson will target both.
On this note, why not show your kids how much you love them by giving them a copy of my book, Grandpa's Fortune Fables (fun stories to teach kids about money) 😍
Will diamonds be so expensive in the future?
I also explained to my daughters that in the future diamonds might not be as expensive. There are two reasons for this.
1. Environmental Impact
Digging for diamonds uses a lot of energy and requires a lot of land to be dug up. As people become more environmentally focused, they will seek alternative ways to demonstrate their wealth and love. This could potentially lower their value.
2. Lab-created diamonds
It is now possible to create diamonds in a laboratory. These diamonds have the same structure as those found in the ground (and are less harmful to the planet). This means more diamonds will be available and could drive down the price in the future. Although going back to emotional marketing, people might feel that a diamond created in a laboratory isn't 'romantic' and would pay more for the same diamond from the ground.
I note that I didn't discuss 'Blood Diamonds' with my daughters as they are both still young. This is clearly an important topic for when they are older.
I really enjoyed sharing these 3 reasons why diamonds are so expensive with my daughters.
Don't get me wrong, I'm not saying that my daughters, or anyone else, shouldn't buy diamonds. People get a lot of pleasure from owning a diamond. I sometimes see my wife looking at her ring from time to time which makes me smile.
I want my daughters to be educated about why certain things cost so much money and make the most of their pocket money. I also want them to learn different ways companies use marketing to get people to buy their products as it might help them be more informed when they are buying large items when they are older and also help them sell more if they start their own businesses.
What to read next? Why and how to teach kids to start selling
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P.S., Do you want your kids to grow up looking after their money? Grab them a copy of Grandpa's Fortune Fables today!