Costco’s Business Model (2019)

1. Gross margin is kept under 14%, with an average reportedly around 10%. This is achieved through low-margin, high-volume sales—often requiring bulk purchases, such as buying by the dozen or case.

2. Traffic-driving strategies:
- Members may bring one guest.
- Spotlight deals on luxury goods and other products generate buzz.

3. Membership and profitability
Non-members are not allowed entry unless escorted by a member. Only members can access these low-margin products.
Premium members receive a 2% cash-back shopping voucher, capped at a certain amount.

This is a textbook case of economies of scale combined with a membership model—essentially a fan-based economy. #Perspective

A streamlined SKU strategy focuses exclusively on mass-market, high-frequency, and essential items. Sam’s Club carries about 4,500 SKUs, while Costco offers roughly 3,800. That means only two or three bestsellers are available per category, saving consumers time on decision-making and reducing procurement and inventory-management costs.

Lean, warehouse-style store design, pallet-based displays, oversized cartoonish packaging, and owning and building stores (warehouses) themselves—all of these help keep costs as low as possible. On that foundation, gross margins are deliberately minimized, and products are sold close to factory price. Exceptional value for money attracts and retains members.

Revenue doesn’t come solely from selling goods. Customers must pay a membership fee to shop. Membership fees are a core profit driver; selling products is merely the “traffic entry point.” Membership count has become the company’s key growth metric, shifting away from the traditional “make money only by selling goods” model.

Member services: At Costco, beyond special categories like jewelry, customers can return used clothing or opened cups at any time without conditions. During the membership period, members can cancel their card without explanation and receive a full refund of their membership fee.

This unconditional generosity earns deep consumer trust; actual return rates are surprisingly low. Conversely, renewal rates are very high. Historical financial reports show a renewal rate of 90% in the U.S. market and 88% in Canada.

If an external supplier offers the same product at a lower price elsewhere, that product will never reappear on Costco shelves again.

About 25% of Costco’s offerings are private-label products (notably its well-known Kirkland Signature brand), while the remaining 75% come from other brands.

Why this allocation?

Because the 25% private label is used to pressure the other 75% of branded goods into lowering their prices.