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The Internet at Work: Diamond Edition

There’s a fascinating article in today’s N.Y. Times about Blue Nile, an online diamond merchant that seems to be smoking its brick-and-mortar competitors. Five years ago, this would have seemed most unlikely. As the article’s author, Gary Rivlin, puts it: “People might be willing to buy a book online, or a CD, and maybe a toaster … but a $3,000 diamond engagement ring?”

And yet “the average diamond ring bought at the Blue Nile site,” Rivlin writes, “costs $5,500, twice the industrywide average of $2,700.”

That is not because Blue Nile is more expensive; it is in fact much cheaper than brick-and-mortar stores, but draws a higher-end customer.

One of the most interesting pieces of this very well-reported article is an example of how the Internet continues to put downward pressure on prices:

It is easy to sympathize with the Main Street jeweler confronting a rival like Blue Nile. It operates no stores, only an office in downtown Seattle and a modest-size warehouse on the outskirts of town, so overhead eats up just 13 percent of its revenues, compared with 30 to 40 percent at a traditional Main Street retailer.

That allows Blue Nile to sell its diamonds at roughly 20 percent over cost and still make money, Mr. Vadon said and analysts confirmed. By comparison, the typical jewelry store sold its rings for 48.7 percent above cost in 2005, though that is down from 51.6 percent in 2002, an annual survey by Jewelers of America found.

As a result, Mr. Gassman, the [jewelry industry] analyst, found in one study that Blue Nile sold rings for 35 percent less than comparable rings at Zales.