Blue Nile Sparkles

I recently had the chance to interview Diane Irvine, the CEO of Blue Nile. This leading online retailer of diamonds and fine jewelry has taken over the industry and recently reported financial results for its second quarter with net sales increased by 9.7% to $76.6 million. Despite the current economy, Blue Nile set another record sales quarter.

 Blue NileBlue Nile was founded by Mark Vadon in 1999 after he was frustrated with the engagement ring-buying experience. The education process of buying a ring involved learning a system of codes depicting color and clarity and learning arbitrary social norms. The journey eventually led Mark to a new wife, but it also led him to an unlikely new profession. Mark became a diamond salesman himself.

The idea came to him quickly. He first needed to find a store that was already set up to sell a diamond ring online. He found one--a small mom-and-pop jewelry store in Seattle that had set up a Web site. After purchasing the diamond ring online, Mark went to visit the owners. He bought the store, and then started selling diamonds on a larger scale online in 1999.

Blue Nile's launch could not have been more poorly timed. It launched online just as the "dot-com" bubble was bursting. But luckily, Blue Nile was one of the few pure, online businesses to survive. Over the next four years it grew to $120 million in revenue, in 2003 it went public, and over the subsequent five years it expanded 250%, reaching $320 million in annual revenue.

We cannot explain Blue Nile's success with traditional logic. It owns no diamond mines, as De Beers does. It enjoyed no pre-existing customer captivity as Tiffany has been able to build with its distinctive turquoise bags. But if you analyze how Blue Nile's management team explains its success you see the inner workings of an outthinker. Blue Nile cleverly plays on several industry dogmas and so has designed a strategy competitors have difficulty responding to effectively.

Traditional advantage

Starting with the traditional advantages--economies of scale, preferential access to resources, and customers' captivity--we see that Blue Nile understands how companies win. It is working to build all three sources of advantage.

  • Economies of scale: by selling diamonds directly to customers, rather than through stores, they understand they are building a "scalable, capital-efficient business model that enables growth with lower working capital requirements than traditional store-based jewelry retailers."
  • Preferential access to resources: the company invests heavily in continually strengthening its supply line. As Diane underscored when I spoke to her, "We can dynamically display approximately 60,000 individually certified high-end diamonds for sale to consumers and clearly one couldn't do that before the Internet existed. We're doing this via exclusive supply relationships with some of the largest diamond manufacturers around the world who are cutting and polishing the diamonds and then giving us listings of their inventory. And the exclusive relationship provides that we're the only consumer-based Internet company that can show those diamonds for sale to customers."
  • Customer captivity: Blue Nile says it maintains "an obsessive focus on the customer. We believe that maintaining high overall customer satisfaction is critical to our ongoing efforts to elevate the Blue Nile brand and to increase our net sales and net income." When the company provides effective customer service, it has the potential to build a uniquely strong emotional bond because the company is engaging its customers at one of the two to three most pivotal moments in their lives. As Diane describes, "We're dealing with someone during a significant time in their life. It's a happy occasion. We're helping customers and many times we're the first person to know that this individual's going to get engaged."

The Blue Nile Difference

While Blue Nile is competing well across the traditional sources of advantage, the traditional sources of advantage are no longer enough. Tiffany is also competing to build economies of scale (more stores and inventory), secure preferential access to resources (proprietary designs and brand), and establish customer captivity (for example with its immediately recognizable Tiffany bag).

Tiffany has been playing this traditional game since 1837 and they are good at it. This means Blue Nile must create additional points of differentiation.

This is where Blue Nile's customization comes into play. With more than 70,000 diamonds and a few hundred settings, Blue Nile can help customers design more than a million different rings. Because each diamond and setting is chosen by the customer, they can truly create the ring they want. In the traditional jewelry space, customers are forced to choose from the diamonds and settings that are currently in the store. The client isn't encouraged to mix and match diamonds and settings, and therefore the options are limited.

Blue Nile's approach puts the consumer in control and makes sure that client is satisfied. If a person wants a great diamond with a small carat weight, they can find it. In traditional jewelry stores, that is virtually impossible. Blue Nile truly serves the client first and therefore the company's bottom line grows.

Blue Nile's competitive advantages are clear, but this company isn't resting on its laurels. Over the next week or so, I will be sharing other aspects that differentiate Blue Nile from its competitors. Ask yourself the questions below to see if you can copy some of Blue Nile's successful strategies.

  1. Is there a way to scale our business or processes in order to lower overhead expenses?
  2. Is there a company we can partner with that can offer us more control over a particular resource?
  3. Is our business truly focused on the client?
  4. How can we provide better customer service?

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