Here's Why Costco Charges Membership Fees -- and Why They're Worth It
- Costco’s annual membership fee generated $3.9 billion in 2021, almost 80% of its profit that year.
- Annual membership fees allow Costco to offer their products at lower prices.
- In addition to generating continuing revenue, Costco states that its membership fees reduce shrinkage and engender greater loyalty among its members.
Here is why Costco’s membership model benefits everyone.
Costco is one of the largest and most popular wholesale retail chains. Costco offers two membership tiers:
- $60 a year for the “Everyday Value Gold Star” membership. Benefits include two membership cards for you and someone in your household.
- $120 a year for the “Executive” membership. Benefits include a 2% annual cash back reward on purchases (up to $1,000), two membership cards, and Costco Services discounts.
Compared to stores like Walmart, Target, and other national grocery store chains that don’t charge membership fees, these annual fees may seem steep. Costco has close to 115 million members worldwide. Here is why Costco charges annual membership fees and why they are worth it.
Businesses typically will have two strategies, either be the low-cost leader or differentiation from their competitors. Costco’s strategy is to provide the lowest possible prices. This is why Costco’s warehouses offer a no-frills experience with bare-bones operations. Per its website, Costco strives to give their “members the best products at the lowest possible prices” and the annual “membership fee allows us to offset many of our operating costs and price our merchandise lower.”
Total sales for Costco in 2021 were $192 billion, an increase of 18% from 2020. Costco’s net income, or profit, increased by 25% to $5 billion. Last year, Costco brought in $3.9 billion in membership fees, a 9% increase from the prior year. One way to look at Costco’s numbers is that its membership fees made-up almost 80% of its profit.
Costco’s business model is to operate membership warehouses and e-commerce websites that offer members low prices on a limited selection of brands in a wide range of categories. It is able to offset the low prices through high sales volume, self-service warehouse facilities, and membership fees.
Another reason Costco uses a membership format is to deter people from stealing. By strictly controlling the entrances and exits and checking membership cards, Costco’s inventory losses, also known as shrinkage, are well below that of its retail competitors.
Costco’s shrinkage amounted to 0.11% to 0.12% of sales. In comparison, retailers lost more than 10 times that amount to shrinkage, averaging 1.33% of sales. Costco’s membership model and the bottlenecking at the entrance and exits of Costco make it difficult for thieves to succeed.
Clearly, Costco’s membership model is working. Its member renewal rate was 91% in the U.S. and Canada and 89% worldwide. Crucial to Costco’s success is membership loyalty and growth. The membership format “is designed to reinforce member loyalty and provide continuing fee revenue.”
In addition to engendering loyalty among its members, many feel they belong to a private club. Only members are able to purchase Costco products. Another psychological aspect is that since members pay a fee, they feel obligated to take advantage of their Costco membership and shop there. Members don’t want to feel as though their paid membership is going to waste. All these factors create greater loyalty.
While Costco annual membership fees may seem high to some, it allows Costco to offer its goods and services at lower prices. Many members feel like they belong to an exclusive club, helping Costco’s brand and in turn member loyalty. Costco saw incredible growth in 2021, with its revenue increasing by almost one-fifth from the previous year. Costco has a devoted following and there is no sign that member loyalty is fading.
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