Blue Nile's Cheaper Diamonds Need Not Threaten Tiffany. Here's Why.

The Astors draped themselves in Tiffany diamonds; Marilyn Monroe made them "a girl's best friend;" Audrey Hepburn's Holly Golightly called Tiffany's flagship New York store "the best place on earth."
But today, for a significant portion of diamond-buyers — men looking to propose — the answer is not the exalted little blue box, but low-cost online entrant, Blue Nile. The threat of Blue Nile has been felt most by mom & pop jewelers, but increasingly by the middle market retailers like Zales Corporation, as well as high-end brands like Tiffany and Cartier.

So what should premium diamond retailers do? The answer may be counterintuitive: nothing. As my colleagues explain in "Surviving Disruption," sometimes it's better for an incumbent to focus on its relative advantages and cede parts of the market to the disrupter instead of trying to compete head-on.
Blue Nile's primary advantage is that it offers diamond rings online at prices that are as much as 35% lower than traditional retailers. Their basic premise is that loose diamonds are commodities; quantifiable details (e.g., the 4Cs of carat, cut, color, clarity), a few photos and a price should be all a man needs to select a diamond. Blue Nile also provides simple-to-use educational tools and an impressive virtual inventory (they act as a middleman for diamond wholesalers). For men who hope to optimize affordability, speed and anonymity in their ring search, Blue Nile is a clear winner.
While Blue Nile is a great choice for men who prioritize spending all of their budget (regardless of size) toward the diamond itself, there are other men who choose to allocate some of that budget toward personalized service or certain brands. For this latter group, they have a different set of "jobs-to-be-done" that traditional retailers are better at fulfilling than Blue Nile.
For example, for men who are hiring a diamond seller because they are nervous about finding the perfect ring, a brick & mortar retailer is a safer bet. In a store, they can gauge a particular diamond's sparkle with their own eyes, or they can confer with the jeweler, relying on his artistry. In a high-end store, they can be assured that the choices are socially affirmed, expert designs. As one young man I emailed with put it, he wouldn't buy from Blue Nile for the same reason he "wouldn't buy a used car from eBay motors. A car is more than mileage, year, make and model (does it smell? does it ride smoothly?) Likewise, a diamond is more than what is defined by the 4Cs." Though my friend recognizes that he was in part managing his own emotions, he didn't want to lose any sleep over his purchase by "optimizing cost over confidence." And that's the point. Blue Nile's online platform couldn't fulfill his job of being completely confident in his ring choice.
Of course, some men buying diamond engagement rings have another "job" they want done: signaling status. For them, a high-end luxury jeweler is better suited to that task.
No matter how much Blue Nile tries, it won't be able to compete with Tiffany and its bricks & mortar brethren to fulfill these two jobs unless they overcome very significant business model barriers. To even begin to compete, Blue Nile would have to create a physical retail network, keep diamond inventory, and invest in significant, sustained marketing efforts. This would completely undermine their cost structure, forcing higher prices and eroding their competitive advantage.
Where does this leave the traditional diamond retailers? Instead of seeking to compete directly with low-end disruptors, they should seek to become even better at the jobs that Blue Nile can't co-opt. For Tiffany, this means they should focus on cultivating their image of luxury and the "job" of signaling status, cutting the lower-priced "Return to Tiffany" line. In making Tiffany's little blue boxes accessible to everyone, they damage the brand's exclusivity and its ability to convey status.
Meanwhile, middle-tier firms like Zales and Jared should focus on customers who want to feel confident they're buying something their girlfriend will want. To fulfill the job of optimizing confidence, they could, for example, host "diamond nights" at their stores during which friends can come try on diamond rings together. Once a woman finds one she likes, she could register her favorite with the retailer. The store could then make that knowledge accessible to her friends or to her boyfriend (preferably when asked!). Knowing that his girlfriend has fallen in love with a particular ring would make the the man (finances permitting) less likely to go elsewhere for the ring, for fear of disappointing her.
On paper this seems relatively straightforward; so why is it, in practice, so hard? No company facing disruption likes to acknowledge that they can't win it all. But sometimes, relinquishing certain customers isn't an act of desperation. Rather, it returns a brand to where it should have been comfortably enthroned all along.