How does Costco make money: The Costco Business Model
Costco Wholesale Corp. is one of the most popular retailers in North America. They have over 800 locations and make billions of dollars each year. Costco sells everything from groceries to electronics to fresh foods and apparel.
How does Costco make money? The answer lies in Costco’s business model, which has helped them become one of the most successful companies on earth.
In this article, I will discuss some surprising facts about Costco that will help you understand more about why they are such a powerhouse company today.
Costco: Company Profile
What is Costco?
Costco is a membership-only big-box retailer, which started in 1983 by James Sinegal and Jeffrey Brotman. Costco operates more than 800 warehouses throughout the United States and Canada, and its headquarters are located in Issaquah, Washington.
Costco employs over 270,000 people worldwide. Costco’s competitors include BJ’s, Walmart, and Sam’s Club.
How does Costco work?
To shop at Costco, you must get a Costco annual membership. Once you purchase an annual membership, you can buy at over 800 stores. To become a member, you must pay an upfront $60 (or $120 for business members).
What is the Costco’s USP?
Costco is the cost leader of their industry. Their business thrives on selling products at marked-down prices to customers with a low-profit margin.
Costco doesn’t cut prices at the expense of quality and profitability to gain more market share. Instead, they pass those savings onto their members in the form of lower prices. Costco pays its employees much higher wages than its competitors.
Costco caps markups on national brand items at 14% and their house brand at 15%. Costco members benefit from any increase in volume discounts their wholesaler gets from their supplier.
Costco doesn’t sell anything but what sells well. Their focus is on selling products that have high sales volume. This allows them to negotiate better deals with suppliers.
With 145 billion dollars in costs of goods sold coming from only 3,700 different items, Costco has an advantage when negotiating with suppliers.
Costco buys goods directly from manufacturers and it saves money by eliminating the middlemen. Their warehouses are very spacious and easy to navigate, and they sell products quickly and efficiently. Costco maintains them well and Costco’s food court is popular among customers.
Costco’s business model is based on buying large quantities of goods at low costs. This allows them to sell products at lower prices than competitors. As they continue to buy more goods, they become larger and larger. Their growth increases their market share and lowers their costs further.
What is the Costco business and revenue model?
Costco operates and earns revenue through a few business models, especially the membership model. Let’s look at the Costco Business Model:
- Membership-only warehouse club business model.
- Transaction based business model
- B2B2C business model
Costco’s Statistics
Costco’s members: Costco has over 113 million members. In 2021, membership fee revenue was $3.9 billion, making up less than 2% of Costco’s total revenue of $195.9 billion. Costco’s net income was over $5 billion for 2021.
Online Sales: e-Commerce sales for Costco were $14.8 billion or 7.7% of the net sales of $192.1. Costco’s eCommerce business is snowballing. In 2020, e-Commerce sales accounted for $9.8 billion or 6% of the net sales of $163.2 billion.
How does Costco make money?
Let’s look at Costco’s revenue model. How does Costco make money? Costco has Costco makes most of its money from membership fees.
To attract more customers, they lower the price of items every year, and their sales multiply. At the end of 2021, Costco had 113.1 million cardholders and 828 membership warehouses.
In-store Merchandise Sales
A major part of Costco’s total revenue is from its in-store merchandise sales. In 2021, Costco grew its top line by nearly $30 billion with total net sales of $192.1, a 17.7% increase from the $163.2 billion in fiscal 2020. 92.3% of the total sales are from in-store merchandise sales.
Membership Fees
There are many two kinds of Costco memberships. The Gold Star Membership costs $60 per year, and the Executive membership costs $120 per year. Executive membership costs $120 and gives extra benefits such as 2% cash back on eligible purchases. The primary membership card costs $60.
Each member is entitled to issue an extra card to a member living within the same household or to another staff working in the same organization. The Costco member-renewal rate is outstanding. It is 90.7% in the United States and Canada and 88.3% worldwide.
Costco’s membership fees are high because of its low prices, and customers are loyal due to its low prices and good quality. Costco’s membership revenue from membership fees is in the billions. As more people join, the costs get reduced, and Costco can grow faster.
Final Thoughts
Costco Wholesale Corporation is a retail giant, and it continues to grow rapidly. It has a simple business model that focuses on buying goods in bulk at low costs and passing those savings onto its customers by setting a low-profit margin.
Costco makes most of its money in in-store merchandise sales, earning significant revenue from online sales and membership fees. Furthermore, Costco has high retention rates and customer loyalty because it is a great place to shop, and its prices are unbeatable.
