Last week, we sold a $23,000 pair of earrings. They were nice, 1.21ct each, one was hearts and arrows and the other ideal cut.
Unfortunately, when we did our sums we realised that we had really made a loss on the sale, even though to most people, especially accountants, we had made a nice profit.
Anyway, the story goes, the client came in two Fridays ago and bought, and paid for the earrings in full. At the time the Australian dollar was worth about 78 US cents, so there was no compelling need to increase the price of these two diamonds as they were bought when the dollar was worth about 81 or 82 US cents.
Because the earrings were so big, we had to hand-make the settings, and to compound our woes, we were out of white gold screw-back posts and scrolls, so they needed to be ordered from Sydney. To cut a long story short, the earrings were picked up a week later when the dollar was worth 65 US cents.
Now to the layman, especially accountants, we made a good profit, as the pair of diamond earrings only cost about $17000. However, to the professional diamantaire, looking further into it, we made a loss, due to the replacement cost of the two diamonds.
As it turns out, to replace these diamonds it would cost us about $22,000 with the dollar at 65 US cents. Still $1,000 profit. However, when you take into account the income tax we paid ($6,000 x 30%), we made about $1000 loss!
Whilst we do try to adjust our prices to keep up with fluctuations with the US dollar (mostly the larger ones though), we are still vulnerable to huge fluctuations in the dollar.
Therefore, it is important to note that whilst there may be room to move on our prices and still make a paper profit, it would be silly to discount a diamond bought a 80 or 90 US cents and end up having to replace it at 65 US cents. It is simply not a matter of “making the next guy” pay more as the money we take in from a sale needs to cover both replacement cost, overheads and profit.
AUD 
November 26th, 2008 at 8:39 am
Hey listen guys – I know there’s a bit of creativity needed in your business,so you’re probably a great lateral thinker, but why EVER do you use muddy thinking in what is a simple business calculation? Were you joking???? If not, I sure hope the diamonds you offer are a good bit brighter! ;-P
Of COURSE replacement materials will cost more. Even my 7 year old grandson knows “prices rise”.
Yes, if you’re going to hold stock you’ll have to replace the diamonds at a higher price – but those prices will be reflected in the next sale! (Cost of goods sold + profit margin = price) The exchange rate is immaterial (except in terms of the price tolerance of your buying public – which at $23000 for a pair of ear-rings aren’t really going to blink).
This really makes me doubt ever wanting to do business with you coz you are entirely off centre in your logic. If you have seriously shared your pricing strategy, (and aren’t just baiting us to get this kind of response!?) all I can say is: Caveat Emptor!
Cheers
November 26th, 2008 at 1:44 pm
Hi Helen
Because we operate on very low margins, the exchange rate is not immaterial.
Furthermore, because we don’t take goods on consignment, we don’t have an “unlimited” credit line with our suppliers, therefore, if the exchange rate does go down, then we have to increase our price in line with our replacement cost.