The Internet, diamonds & the "fine things in life"

It's almost been a month since my last post. However, I went to Mumbai's Bar Camp 3 yesterday and am charged up sufficiently to add this one post today. In the next couple of posts, I'm going to be writing about how the Internet is making more easy some of the "finer" things in life, and I begin with diamonds. Hopefully, this should interest most of us, so here goes :

It is traditionlly believed that the Internet is not for transactions of high value, touch-and-feel items like,say, jewellery.

Blue Nile
However, Blue Nile (NASD : NILE), a Seattle-based online retailer has helped challenge this belief. Last year,it beat marquee name Tiffany's to become the largest retailer in the U.S. by revenue of diamond rings and wedding bands - across online and offline jewellery stores taken together. It's revenues were $319 million. Over 70% of this was from diamond rings and about 20% was from diamond earrings.

In an industry comprising many players, the company has a market share of 4% in the engagement ring market. It's begun shipping to 25 overseas markets as well.

How they started
It's been a somewhat unusual success story. Co-founder (& former-CEO) Mark Vadon was a 28 year-old consultant with Bain when, in 1998, he dropped by at Tiffany's in New York City to shop for his engagement ring. Here,however,he got disenchanted by the less-than-friendly attitude of the staff , even though he was willing to spend over $12,000. He then went online looking for a Consumer Reports-type site i.e. a site where they would teach a prospective buyer on how to buy. He stumbled upon a site called Internet Diamonds which - though basic - had the tutorial he was looking for. On this site he also found and bought a ring which he believed was nearly identical to the one he had spotted earlier at Tiffany's but, at $5800, was less than half as expensive.

A few weeks later Mark happened to be in Seattle on business and here he dropped by at the Internet Diamonds retail store. The site owner informed him that the store sold a diamond or two every other day , at the same (average) price of $6000. Mark did a quick calculation, found that here was a business doing $250,000 in revenue , despite it's vanilla website and zero marketing. It was thus probably worth much more. That evening, he made an offer of $5 million for the online store, an offer that was accepted by the then owner.

Mark didn't actually have the money to buy. Since it was at the peak of the dotcom boom, however, Mark was able to quickly raise the money. In fact, over the next 12 months, a total of $50 million was raised, apparently without much difficulty.

The site was renamed Blue Nile. In 2000 itself, the first full year under Mark's management, revenues grew to $44 million. However, as was true of many other online businesses during the period, Blue Nile too spent heavily on advertising ($40 million on TV) and lost big money ($30 million that year). Next year, however, the company cut advertising spend to zero,decided to build the brand through word of mouth alone, and survived.

Success factors
Blue Nile believes that what has really worked for it is customer focus i.e. obsessive listening to customers , looking at customer data and getting very many details right. Of course, educating it's website visitors on "how to choose the right engagement ring" is core to this. The site tells you how much to spend (two month's salary) and shows the ten typical diamond cuts, from "round" to "cushion".The size of the diamonds, usually quoted by the industry in carats, are converted into milllimetres, so that all customers understand.There is a slider scale that enables customers choose trade-offs for a given budget e.g. get an ideal cut and a brighter stone, but at a lower carat size.

And Blue Nile's site looks good, period.

Majority of the visitors to the site are believed to be women who then email their men their preferences. The men are the ones who make most - 85% - of all the purchases (rather an unusual gender split for a jewellery purchase). Going to a retail store and being hustled by salespeople about a product they don't know much about can be intimidating for men, so the anonymity of an online retailer turns out to be a blessing.

(It's a guy thing, trust me, I've been planning buy a diamond for the better half from a neighbouring store in Mumbai, but keep postponing a visit :-)

On Blue Nile an average a customer takes 3 weeks to make up his mind and spends $6,200.High value diamonds are couriered under special security (armed guard & vans) to customers.

Blue Nile displays items it does not own. It sources these from diamond wholesalers only when an order has been placed on it, in effect carrying negative inventory. Further, overhead costs account for just 13% of it's total cost as compared to 30 to 40% for the (offline) jewellery stores. It is also now the largest retailer overall so enjoys economies of purchase.

Thus, today the company can sell at 20% above purchase cost as opposed to 49% above cost for the jewellery stores.

Orders are fulfilled in three days, faster than at most retail stores. And customers are offered a 30-day return policy.

Lessons from the Blue Nile story :
1. There is a value in the information and the convenience of buying online, no matter what the item. Just that it's upto the online company to tweak the customer value proposition and the site tools to make the site succeed.
2. Trust has always been an important component of online transactions. However, in this cateory viz. jewellery it's an overrated concept. Because it can be built over time. Each transaction, if well-fulfilled and honoured as per customer expectations, is an opportunity to build word of mouth. And word of mouth is the most important type of marketing here.
3. This is not a category where the auctions sites (read EBay) can be very successful. It's difficult to have a reputation management system in a category as sensitive as this.
4. On the Internet, it pays to be on the side of the customer.
5. Blue Nile seems to have chosen to sell premium range stones, since the the modal price in brick-and-mortar stores is just $3200. Even at Amazon, the modal price seems below $1000.

There is always money to be made in any category at the premium end, I believe. And a good U.I. (user interface), site looks & value-added site features are critical to the success of premium online products.

An Indian online jeweller, any one ?
It's instructive to know that there are virtully no established online jewellery retailers in India. Brands with established names e.g. Tribhuvandas Bhimji Zhaveri either have a vanilla website or none at all.

And there is sufficient detail to be attended to should one want to go the Blue Nile way. Which makes it unlikely that existing ecommerce sites or portals can do justice to the jewellery category. A quick glance at these sites confirms that their jewellery sections have enough lose ends to result in a low conversion of site visitors to their jewellery sections.

So the opportunity exists for someone who has contacts with the Indian jewellery industry, is willing to educate prospective customer online and is, of course, "innatively honest" (customers will always research similar stones and prices at the brick and mortar stores, so be honest with what product information you give online).

The market is very large. The costs of running a site are,well, affordable. And tools like Ajax, Flash & video which are now entering mainstream, if used wisely, can create a compelling online experience for the prospective customer.