The Diamond-Water Paradox
Here's how the concept of marginality - “value in use” & “value in exchange” affects the perception of users / markets
Remember the famous “Priceless…” advert by MasterCard? Here’s one of those.
There was a sequence of adverts released by Mastercard featuring the “priceless” campaign sporting the very famous tagline “There are some things money can’t buy, for everything else there’s MasterCard”.
The one that caught my fancy goes on the lines of:
-> Business class tickets for your parents...
-> Renting a luxury car...
-> Tickets to the amusement park...
-> Watching them become children again...
-> PRICELESS!
There are some things money CAN’T buy, for everything else there’s MasterCard!
Indeed, somethings are priceless and money just can’t buy them. One of them is LIFE / prolonged good health because whether you like it or not the body deteriorates & gives in.
When one could still buy good healthcare, which constitutes the best medicine, boast of having the state-of-the-art healthcare facilities, that sadly is not a given for prolonged & naturally healthy life. Covid has proven this beyond any reasonable doubt because if the converse was to be true not a single rich man / woman would have lost their lives to the dreaded virus that put the entire world in a tizzy.
But it is interesting to get a couple of levels under the skin of this perception and break it down to reach an understanding of what’s considered priceless & what’s perceived as buyable (which is altogether different from affordable though).
Take a precious stone like diamond for instance.
What’s the value of a diamond?
A 1-Carat diamond could cost anywhere between US $2,000 and $14,000 depending on the complexity of the cuts. The more the cuts the more lustrous the rock gets.
Now, pit that against a common commodity like water that’s absolutely essential for life. It’s more of a want than a need. A 1-liter water bottle costs US $2 - $5.
And that right there is the very birth of a paradox. Water being perceived more useful & more elementary facilitating life for living does command only a shady percentage of the price when compared to diamonds that don’t really help in similar vein.
And here are few more STATs (source: STATISTA):
“In 2023 in the USA, De Beers posted a revenue of US $4.267 bn. & Nestle Waters posted $4.5 bn.”
Yes. Water is pretty basic a commodity and its also true that there are numerous players in the bottled water market space (2737 in the USA as of MAR 2023 to be precise).
OTOH, USA accounts for 40% consumption of the global diamond market although the number of players actively involved there in that space may be quite lesser than 2.7K.
So, what’s the verdict? What’s more precious now, DIAMOND or WATER?
I know what some of you are thinking… “Why is that even a question?”.
But why does this huge contrast / divide exist in the first place when it comes to some commodities?
One way to break this down is to understand the purpose it is serving.
If you consider a commodity that makes life possible – WATER would score higher obviously given its prolonged and regular use
If you pin on parameters to measure the success of an individual – DIAMONDS could be the one but that obviously comes with the assumption that a significantly large section of the world considers the ROCK as a default / goto means towards showcasing their success *
* But the reality is entirely different; When other Gadgets or even Gold does still rule in this contingent, Diamonds still can’t be perceived as a reflection of one’s wealth owing to beliefs rooted in astrology & how it discourages some from owning these stones;
And that brings us to the interesting concept of “MARGINAL UTILITY”.
Definition:
"Marginal utility is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary or marginal utility"
[Source: Wikipedia]
The reason diamonds command a higher price than water owes to the additional satisfaction one’d derive over the possession of the commodity which is to say the “margin” in economics terms. So, in spite of water having a greater consumption diamonds have a greater marginal utility.
If you look at the current timeline we are living in, there are many products that may have started out as a basic and elementary given the purpose they were meant to serve but have grown to acquire the status (/ margin as it is called here) given the change in perception.
Let’s take a few examples and understand this better.
1) Cryptocurrencies (Bitcoin in particular)
What’s the value of a bitcoin today?
Transport yourself back to 2008 and the article titled “Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto” and the need for a decentralized currency that could exist and function without any administrative authority which eventually led to the mining of the genesis block of the Bitcoin [Block 0] in Jan 2009.
What started as an idea for a parallel system / currency stands valued at US $50K today. So, the commodity moved from being consumed albeit selectively to becoming more refined / marginal over a period of time as it gained popularity and weightage proportional to the awareness people developed in the markets.
2) Apple iPhone
Ok, I know I may get some flak for saying this but consider the Apple iPhone (FYI, I’m an iPhone user myself for over a decade now before you can label me as judgmental) & observing the trendlines it could also be on its merry way towards being termed marginal, if not today in the near future for sure.
Just take a look at the prices shooting up from sub-500 to the costliest version sold across the retail space today priced at $1750 (I am not bringing those jewel-studded custom-built versions here as they are in a league of their own).
That’s a 40% increase in prices between the 2 top versions of iPhones released in the recent past.
A major learning from this:
The one primary learning here is how it is all boils down to PERCEPTION & whether the market seems to be in awe of the product(s) in question. And that includes (but is not limited to) the parameters the users subject the product to before they arrive at the BUY decision & also more importantly the purpose the product serves in their lives, MARGINAL or OTHERWISE. Also, all of this could subtly change with small changes in geography, orientation of beliefs etc.