Costco Makes Most of Its Gross Profit Before You Buy Anything
The fees are only 2% of revenue, but they produce 73% of gross profit.
Taylor Bell · Inside Costco: The Shocking Strategy That Built The Most Loyal CustomersWalk into Costco, one of the biggest retailers in the world, and the company has already made most of its gross profit off you. About 73% of its gross profit comes from membership fees, collected before a shopper puts a single item in the cart.
That is possible because Costco barely profits on what is in the cart. Its public pricing rules cap markups at 14% on name brand goods and 15% on its own Kirkland label, compared with 25% to 50% at traditional retailers. The company would rather sell huge volumes cheaply, and keep shoppers coming back, than squeeze more from each sale.
Jim Sinegal, the co-founder, said in a recent interview: "Many retailers look at an item and say, I'm selling this for $10, but how could I sell it for $11?" He added: "Costco looks at it and says, How can we get it to $9 and then later, how do we get it down to $8?"
The fees do the heavy lifting. Memberships cost 65 dollars to 130 dollars a year, and Costco counts 137 million members. Last year, those fees were only about 2% of its 254 billion dollars in revenue, yet they produced 73% of gross profit.
In other words, low prices are not the profit engine. They are the lure that keeps the memberships renewing.
Questions people ask
What does a Costco membership cost and what does it do?
You pay once a year for the right to shop there. The basic Gold Star and business levels cost 65 dollars a year, and the Executive level costs 130 dollars and offers extra rewards. That steady income lets Costco keep markups unusually low.
How does a 14% markup compare in plain dollars?
A markup is the amount added to what the store paid. If Costco pays 10 dollars for an item and applies its 14% cap, the highest price it will charge is about 11.40 dollars. A traditional retailer using a 40% markup would charge 14 dollars for the same item.