Janus Thinking

At the ‘virtual’ centre of our industry, Martin Rappaport has reduced the prices on his price list across the board signalling the need for a major price-cut (perhaps 25-30%) across the market.

Industry insiders will argue that Martin’s prices are based on the nonexistent “New York market approximate high cash asking price.” While Martin is a market expert, his prices reflects baseless assumptions, not consumer reality.  They are hunches and beliefs in the market.  They are, ultimately, arbitrary. 

Meanwhile the collapse they foretell is being artificially accelerated.  What Martin did to the future market for polished diamonds, BHP has done to today’s rough, offloading its stock at prices 30-50% below what used to be the market price just months ago…

For the diamond industry, the writing is been on the wall.  But then it always has been. The message was  clear: if we do not change course, we are heading for a crash. The longer we wait, the faster the downward spiral and the more painful this crash is going to be…

Those who know me can testify that this has been my mantra for the last ten years.  When my message finally appeared last year (see the abstract in this recent Gem and Gemmology), it was the product of several years of research…

My message to the industry a simple one: we have been living in a bubble.

As an  industry we never took the time to stand behind the counter, to speak to the diamond consumer and to listen to his or her needs, wants and aspirations.

Instead of listening, we have spent our time looking to educate the consumer.  But we forgot to educate ourselves! If we had cared for the consumer, we would have realised that they didn’t need or even care for our education. In fact our attempts at education have backfired — so we now see fewer and fewer diamond consumers in the shops.

As a direct consequence the diamond market has been in constant decline relative to other luxury goods. The current demise (although accelerated by a falling dollar and a credit crunch and barely propped up by far-Eastern demand) is not a temporary shock, but a long-term critical illness. 

So, my dear friends and colleagues, it is time to wake up and realise what we have done to our industry with our 4Cs marketing pitch.  We have sowed doubt, not trust.

The DTC already admitted to this terrible failure three years ago. But instead of stopping this ‘ongoing malpractice’ — we intensified it, borrowing ideas from marketing literature without having the slightest idea what they meant.

Among those ideas was the call for branding. I pride myself to be personally trained by one of the world’s leading branding experts, Prof. Leslie de Chernatony of the Birmingham Business School. Leslie was diplomatic enough to call this branding drive “rubbish.”  I say ‘diplomatic’ the market shrank by about $5BN (in relative terms) due to these marketing iniquities, without even counting goods that went unsold.

Unrelated to this marketing shortcoming, and oblivious to actual level of demand, the marketplace kept raising prices without any justification in market demand.  To finance this increase in prices without a complementary increase in demand, those in the middle of the value-chain put their hands deeper into their pockets.  The more sophisticated ones even found ways to convince our generous bankers to finance this illusionary bonanza. Consequently, the market grew - but only on the back of increasing debt to the banks.

So will the present crisis really have any effect on the retail market? I doubt it.  And if it has, is only in the short term. Even with this unprecedented crisis, analysts predict that the luxury market will return to normal in 2009.  Luxury goods, but more especially diamonds are relatively inflexible to mainstream economic trends; demand for them neither brakes in a recession, nor accelerates in a boom. 

Unfortunately, while this may be true for the larger luxury market, I fear this recovery simply won’t come to pass for the diamond market.  The relative value of the diamond market, or what will be left of it, will continue to decline at an even faster pace. 

Now consider the debt, which finances these escalated and unjustified foundations.  When the diamond banks will have to finance the coming sights (De Beers’ sales of rough diamonds), on what basis are they going to estimate their risk? Are they going to finance the real trade prices of the rough, sending their customers to look for impossible extra credit, and thereby preventing them from purchasing their quota? If they do the collapse of the cash-hungry diamond producers is imminent.

Or, will they choose to honour their relationships, finance at inflated levels and take the risk of a wider meltdown.  Maybe the banks will just keep on nurturing the ailing industry without really helping healing it

Would this so bad?

After all, the diamond industry has lived on borrowed time (and money) for a decade.

But the fact is, cannot support such high levels of debt and does not have enough assets to guarantee payoff of all this debt, especially when these assets are in the form of overvalued diamonds. The industry is, de facto, bankrupt.

As long as this state of insolvency is not officially declared, there always a window of opportunity that might allow us to change course. This change must start with a new approach to marketing, led, and financed by the retailers. Once done properly, will prove far cheaper than the amount of money currently being thrown away on empty trade-branding and commoditisation, for naught.  Preparation for this recovery process must start immediately.  It’s now or never.

We face, I believe, the imminent collapse of the entire industry.  While many good people will get hurt, this is not so bad for the industry in the long-term.  After all, there is only one group who are able to pick up the pieces and rebuild the industry – us, the diamond people.

Personally, I would prefer not to wait for a phoenix rising from the ashes. We can still change course.  We must take our medicine and redirect our marketing to the self-esteem that our customers are crying out for.

Gone are the days when demographics were the primary marketing targeting resource. Information available through demographic analysis cannot solely be accounted for marketing strategy since it’s based on correlation, not causality. Demographics continue to be important within the marketing craft, but without the context of psychographics they have limited usefulness.

Psychographics refer to a set of characteristics shared by specific demographic markets that indicate lifestyle choices, buying habits, attitudes or opinions.

The Theta-Lambda worldviews that I’ve developed are an example of psychographic characterisation consisting of two personality types. The typical Theta (Θ) personality seeks affiliation and control whereas the Lambdas (Λ), seek achievement and uniqueness as an ultimate end goal.

As another example, SRI Consulting Business Intelligence classifies luxury consumers into three segments based on psychographics:

• Luxury as functional: This segment is composed of consumers who buy luxury products for their superior functionality and quality. They usually involve themselves in a longer decision making process in order to make rational and logical decisions, rather than emotional or impulsive ones.

• Luxury as reward: This segment purchases luxury goods in order to showcase their achievements. They are motivated by their desire to be successful and demonstrate this to others. They usually purchase ‘smart’ luxury that demonstrates importance while not leaving them open to criticism.

• Luxury as indulgence: This group’s purpose for luxury goods is to self-indulge. They are willing to pay a premium for goods that express their individuality. They enjoy luxury for the way it makes them feel, therefore have a more emotional approach to purchases.

The understanding of psychographics plays an important role within the luxury industry. Although there is no standard definition of luxury or classification of consumer psychological profiles, by understanding the importance of psychographic analysis, one can constantly redefine and refine the term ‘luxury’ in relation to individual customers’ views. By engaging in this analytical process, marketers are able to tailor a product and the marketing message in order to appeal to customers’ desires and motivations.

Luxury marketers should make note that the luxury consumer is always looking for newer ways to satisfy his/her continuously changing needs. Hence, the need to keep a close tab through insightful and concurrent psychographic research is of prime importance.

The way in which consumers interpret companies’ marketing efforts affects how successful their marketing has been.

This might seem like an obvious point to make, but it is a particularly useful point to remember in the marketing of luxury products.

To understand better these different pathways to interpretation, I have developed a simple characterisation consisting of two personality types.

I call them Theta and Lambda. These two personality types differ based on what individuals perceive to be
their life goals or purposes.  These differences are central to how they then interpret the products they buy.

The typical Theta (Θ) personality seeks affiliation and control as an ultimate life purpose.  Because of this, they loom to fit in or contextualise themselves within a desired group and use socially-derived understandings of product characteristics as a basis for their consumption.

Lambdas (Λ), on the other hand, seek achievement and uniqueness as an ultimate end goal.  As a result, they are more likely to interpret products based on their individual responses to the product, how it helps/prevents them to stand out, and how the product benchmarks against their regular consumptive patterns.

What this means is that marketing strategies – and particularly those of luxury brand owners – can apply different positioning to similar products in order to fulfill people¹s different expectations for how the product is meant to help them represent themselves and reflect their life goals.