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Let’s start with a pretty simple statement.
Buying online is going to be cheaper than buying in a store.
We go through the fundamental challenges physical retailers face below but, in short, there is no way they can compete with an online retailer when it comes to price.
We often receive emails from our readers that are hesitant to buy online, despite the fact that they know it will be cheaper. For that reason, I think it’s important for me to explain why I understand those concerns, but I think they are misguided. We have found that far more people end up getting taken advantage of by going into a store than purchasing online. Diamond buying is confusing and, deep down, you realize that you will never know as much as the professionals selling the diamonds.
Many of our readers spend hours pouring over our Diamonds 101 and Diamonds 102 section. You can learn all the ins and outs of diamond buying. But when you walk into a store, you have to be 100% sure you aren’t forgetting any minor detail (they may seriously impact the value of the diamond). After all, you are facing off against someone who is more prepared and more incentivized to make sure you walk out of that store with a diamond on their terms.
When you purchase online, you have the advantage of going at your own pace, cross-referencing (with a site like ours) and checking off all the boxes. We are also able to help with somewhat unbiased opinions. While we usually get paid by the online vendors we recommend, we have no reason to recommend one diamond over the other unless it’s the better choice for you.
The opposite is the case for a retailer. When you walk into a store, the less desirable the diamond, the more incentive the owner of the diamond has to sell it. Which item would a jeweler prefer to sell you? The highly desirable, well valued one that he can sell to anyone? Or would they rather sell the less desirable diamond that is dead weight in their inventory box and on their cash flow sheet?
There have been countless readers who I’ve started the process with and partway through send me a message along the lines of ‘we went to this store and found this diamond that was such a great deal, so we snapped it up.’ I then feel like garbage when I have to point out the things they missed which turn it from a good deal to a terrible deal (improper certification inflating the quality, strong fluorescence, yellow fluorescence, even artificial treatment). Unfortunately, most stores make it very difficult to return a diamond ring.
It’s possible you can find a good deal at a store (by good deal, I mean not much more expensive than an online retailer), but you are far more likely to fall into a sales trap. I’m not saying that you should unequivocally stick with online purchasing, but I think the concerns on principle are misplaced.
Running a physical jewelery store is incredibly difficult. Bear with me as I give a little background. The typical apparel retailer runs a store on 40-50% gross margins. This gives them enough money to cover all the expenses a retailer incurs and, hopefully, leaves some over for profit. While this is a typical profit margin for the store, bear in mind that the wholesaler/manufacturer who sells them the product also has healthy profit margins.
The truth is that the raw materials for clothing are only a fraction of the total cost of the product. That is certainly not the case when it comes to diamonds and diamond jewelry. The actual cost of the goods makes up a much larger percentage of the price than in most industries.
Another issue is the cost of stocking a store. How much do you think it costs to fill up all the racks in a store? Tens of thousands of dollars? A couple hundred thousand dollars? A typical diamond jewelry store needs to have a couple of million dollars of inventory on hand. The overwhelming majority of stores don’t have enough spare cash to pay for that inventory up front. They either borrow money from a bank, buy the diamonds on credit from the wholesaler or just take the product on consignment. In any of those cases, the price has to be higher to cover the additional cost.
In addition to these costs, they still have the regular overhead any retailer faces. Rent and maintenance of a storefront (given that they are selling luxury items, this is pretty significant) and the cost of having a fully staffed store. Diamonds are not a simple item where people can start selling them after a few hours of training. So the staff costs are pretty high.
The Revolution Begins – Blue Nile
In 1999, Mark Vadon revolutionized the diamond buying landscape by starting Blue Nile. There were other sites out there, but Blue Nile had a great business model and they were the ones that made buying online mainstream. They created a market with two major advantages.
The major revolutionary concept they have is that they don’t own their diamond inventory. As mentioned above, the biggest cost for a diamond store is their inventory. Blue Nile just cut that out. With the advent of internet shopping, Blue Nile decided to cut deals directly with the manufacturers and wholesalers of diamonds. They are able to list the inventory directly from those suppliers without actually purchasing the diamonds.
This helps both Blue Nile and their suppliers (which in turns helps the consumer). Blue Nile gets to list thousands of diamonds in “their” inventory without having to sink any money into it. The wholesalers, in turn, get to make sales with minimal effort and are paid right away.
The second advantage they have is overhead. Blue Nile doesn’t need to pay rent for a nice store. They don’t need to constantly update the furnishings. All they need to pay for is office space and warehouse space (for order fulfillment). This is far cheaper than a nice store. And what about employment costs? A typical store that sells $10 million a year has about 30 employees. That comes out to about $333,000 per employee. Blue Nile sells almost $500 million a year with only 300 employees. So each BN employee accounts for $1.65 million of sales.
What does this all mean to you, the consumer? Fundamentally, Blue Nile can afford to sell the same diamond to you with a much lower markup than a physical store can. Simple as that. Your typical store needs to make 30-50% margins on their products to have a healthy business. Blue Nile (which was a publicly traded company, so you were able to see their old numbers) is able to sell you a diamond with only 15% margins. That is significant savings.
Revolution, Part Deux – James Allen
The next revolution that made buying online a better choice was started by James Allen. James Allen is the second largest online retailer. When they rebranded and relaunched in 2005 as James Allen, they introduced a great new feature; pictures of each specific diamond.
The biggest flaw in Blue Nile’s business model was that you couldn’t see the diamond. As we explain in our clarity article, it doesn’t matter if a diamond is a VVS clarity or SI2 clarity. Once the diamond is eye-clean, it’s eye-clean. The problem is that 90 or 95% of SI2 diamonds have eye-visible inclusions.
The photographs allow consumers to sift through all the SI2s out there and pick the one that is eye-clean. This new business model paired the fundamental advantages Blue Nile brought to the table with the ability to use your own eyes to pick out your diamond.
Since then, James Allen has continued to hone their technology. They currently have the best 360 degree video technology for viewing the diamonds.
Buying Online Today
Blue Nile seems to have caught up to James Allen. At the end of 2016, they introduced their own video technology. There are other companies that have joined the fray as well. For a quick rundown, we summarized our reviews so you can find it easier to figure out where to buy a ring.
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