How Jewelers Earn Profit?
It's quite a common perception that jewelers make huge money from jewelry sales.
But, as a buyer, many people don't know how jewelers earn profit in today's neck-deep competitive market. Being aware of different earning models of a jeweler, a buyer can do a more informed negotiation, and can get a better deal on jewelry purchase.
Do you know?
Small diamonds are better earners than bigger diamonds, because latter being comparatively more expensive are sold at lesser margin. Read how carat weight affects price of diamond.
How Jewelers Earn Profit?
Primarily, following are the ways through which a jeweler earns profit:
- Hedging against future price-rise of gold
- Charging pure gold price for low purity gold
- Making Charges of jewelry
- Re-purchase of old jewelry
Hedging Against Future Price Rise
Jewelers usually buy gold and ready-made jewelry, stock those, and then sell at prevailing market price. Now, since the price of gold increases over the period of time, jewelers earn profit by selling at a price higher than the cost price.
Historically, price of gold has always moved in upwards direction over the period of time. There may be some price fluctuations across short span of time, but gold price trends suggest that its price has only gone up over the long period of time.
Charging pure gold price for low purity gold
Many people believe that gold jewelry is made of 24 karat gold, which is not at all correct. Instead, purity of gold used for making jewelry is 20 karat or below. This is because pure gold is not hard enough to be suitable for jewelry, so it's mixed with other metals for increasing its strength.
Always inquire the jeweler about purity of gold used in jewelry, and pay accordingly.
This (purity difference) is where potential of profit lies. While selling, a jeweler may quote price of 24 karat, but would sell low purity gold at 24 karat price.
However, this tactics is not followed by all jewelers, but there are many who will not let go any chance of earning money.
Making Charges of Jewelry
That is why, one must never buy jewelry for "investment purpose". For investment, go for gold bars or gold ETFs.
This is another source of income for any jeweler. Making and polishing charges are added on top of price of gold. Making charges depend on the design of jewelry.
Also, at the time of resale of jewelry, jewelers don't pay making charges to the seller. Reason given by the jeweler is, he will have to re-craft the jewelry, so why should he pay the making charges of existing piece.
Re-purchasing Old Jewelry
In case of re-sale of any jewelry piece, it's the jeweler (from whom the jewelry was purchased) that seller approaches first. Now, this is how the jeweler calculates the buy-back price:
Buy-back Price = (Current market price of gold * weight of gold) - x% of total value
If you don't have special inclination towards any trendy jewelry design, then go for a classic design that has always been in vogue. This will give a better resale value.
This "x% of total value" is nothing but the profit margin of jeweler.
This is because, if the jeweler will sell the same re-sold piece, then he will charge:
(Current market price of gold * weight of gold) + additional polishing charges.
While selling an old piece of jewelry, it's always good to do a proper research before finalizing the deal. One must go for a buyer (jeweler or individual) who is ready to pay the best value.
Finally, the basic knowledge of different earning models of jewelers should help the prospective buyers at the time of jewelry purchase. After all, being aware of jeweler's profit earning tactics, a buyer can do a more informed negotiation with the jeweler and can get a better deal.