Unbranded shopping bags, secret shopping parties at homes, purchases made to look like gifts–these are the lengths to which people are going to hide their spending from their husbands, wives and the public this holiday season.

The New York Times and the Daily Beast have both recently run articles about how people who don’t want to be seen as insensitive to the financial crisis are finding more discrete ways to spend money. Who are these people (mostly women judging from the reports), and what do their new habits say about luxury?

I believe that many of these women are classic Thetas–they seek affiliation and control, and want to contextualize themselves in a group of like-minded women (a group that often gets together and has these secret shopping parties.). They are not acting like Lambdas, who seek achievement and uniqueness and want to stand out.

Said an editor at Allure, a likely Theta:

Shopping is almost embarrassing, and a little vulgar right now.

Despite this sentiment, people are still going out of their way to consume luxury secretly; there’s still demand for it. Thetas are seeking it out on their own–perhaps more attention should be placed on reaching Lambdas during the recession to unlock their desire for things they need.

Does the recession we’re entering (or have been in for a long time now, depending upon whom you ask) spell the end of luxury spending? Of course not, but it has forced both luxury good makers and retailers to change their strategies, often for the worse.

Some luxury retailers, like Bergdorf Goodman, are reaching out, cold calling potential customers to personally invite them to the store. And some luxury good makers are reducing the quality of their products rather than raising their prices. Bulgari has stopped polishing the underside of a $10,000 watch and is using less expensive packaging.

I don’t think this is a sensible course of action. In my opinion, it’s more harmful to a brand to lower its quality than to raise its prices. There will always be price insensitive customers, it just becomes a little more difficult to find them during a recession. The marketing has to be better. Tarnishing the brand will make it more difficult for the brand to recover when business returns to “normal.”

More discouraging news for the diamond industry:

While lower production will start building a floor under prices, we see little prospect of any significant improvement until well into 2009 and expect more juniors to cut back or leave the sector.

said Des Kilalea, analyst at RBC Capital Markets. 

He’s saying that pricing and demand will likely get worse for diamond producers before they get better. While certainly discouraging, we have to remember that the diamond industry is not in as dire straits as the financial sector or the American automakers. We know we can expect at least a 10% decline in demand for diamonds. Mining companies are claiming that the their costs of production are too high with current prices–and they certainly aren’t going to get a government bailout. Will this be enough to motivate the industry to truly embrace the changes I think it needs? I truly hope so.

As participants in today’s diamond industry we are all caught in a belonging paradox, torn between a desire for personal coherence and autonomy and our actual situation of near total dependency on others.

Typically, we respond to this belonging paradox through repression.  We assert that “I am right” but “they” are wrong. I am no exception to this.  None of us is immune.

This false belief that we “know” best leads to very real tensions once the results of our decisions fail to show up – when we start to realise that the others are right as well, in their own way and on their own terms.

The diamond industry is de facto, bankrupt.  But the answer to its future is not to be found in economics, but in psychology.  Psychological forces are more important than economic ones.  While economic forces keep on changing over time, psychological forces are stable; what we see today could be identified yesterday and will still true be tomorrow.

More importantly, as the recent economic events taught us, there are economic factors that we do not have control of or cannot change. Psychological factors are within our reach and once we understand them we can certainly try to cope with them.

A typical reaction to this ‘belonging paradox’ is through projection – the transferring of the conflicted feeling onto a scapegoat or a repository of bad feeling.  Martin Rappaport is one, the economic situation is another and maybe I, with my statements of doom will be seen as another.

But I must stick to my guns, even while acknowledging others’ opinions.  The fact is that the old engagement “dream” identified with diamonds has steadily declined. The socio-demographic fabric has been changed since this “dream” was conceived sixty years ago. Instead this universal dream has been replaced with technical marketing approaches which have commoditised diamonds and eroded their luxury status. From the moment we started to ’sell’ diamonds rather than dreams, the market has been in decline.

The way out of the belonging paradox (and a return the glory days to the diamond market), is to transcend our dependency on ‘them’, by discovering a new message, a new form of leadership and a new diamond dream.

We need: New independent market research, based on solid principles of luxury marketing

We need: New dreams, based on modern society’s aspirations and challenges and desires, not on nostalgia.

We need: New, more intimate channels of communications need to be considered with each new “dream” conceived.

We need: Proper metrics should be put in place to measure success step by step, to provide diamond producers with actionable information.

None of this is impossible.  And none of this is costly compared to the billions that have been spent in overseeing decline.  The key lies in human psychology not market economics.

Our future is in our own hands if only we can transcend the belonging paradox.