Costco Wholesale Corporation is a renowned retailer, operating a chain of membership-only warehouse clubs.
However, owing to Costco’s authority within the retail industry, one may ask how Costco makes money? If you’d like to find out, keep reading to see what I discovered!
How Does Costco Make Money In 2022?
Costco makes money through its membership-only business model, the sale of different product offerings, and ancillary businesses in 2022. The membership-only business model contributes to the company’s revenue through annual subscription plans. Although Costco’s most significant source of income is through memberships, the sale of merchandise both in-store and online largely contributes to the company’s net profits.
If you’d like to learn more about which mechanisms Costo uses to make money, such as revenue from membership fees and more, keep reading for more useful and interesting facts!
Which Mechanism Does Costco Use to Make Money?
The following are methods that Costco uses to make money:
1. Revenue From Membership Fees
Costco earns most of its revenue from the membership fees obtained from the warehouse club business model.
While shopping at Costco, consumers have to pay annual membership fees to access a limited selection of goods.
It’s compulsory for customers to purchase a membership for Business and Gold Star plans at $60.
However, to gain Executive membership, customers have to add an additional $60 fee, hence a $120 annual payment.
Once a consumer purchases the membership from Costco, they are allowed to offer a supplementary card to a person living in the same household or a colleague within the same company.
Non-members may accompany the members to the store, but only members can make the purchases since Costco only allows exclusive members to shop at the store.
By 2020, Costco had managed to have 105.5 million cardholders and 58.1 million paid members.
To offer members different benefits, Costco provides two tiers of membership: the Basic membership plans and the Executive membership plans for both consumers and businesses.
The Executive members get an annual 2% cashback on up to $1,000 purchases per year. Thus, the plan often appeals to frequent customers at Costco.
According to the analysis of customer preference, 39% of Costco’s members pay $120 to gain access to the Gold Executive membership.
It’s important to note that Costco makes most of its revenue from selling access to its products rather than selling the products.
Once a customer pays the membership fee, it’s guaranteed that they will make numerous trips to the store to get the value of the membership investment.
As such, Costco doesn’t necessarily have to worry about a decline in-store sales but instead has to worry about unrenewed memberships.
Consequently, to keep the membership renewal rates high, the company implements strategies that maintain competitive prices that easily attract customers.
So far, Costco’s membership-only business model is marked as a success due to high annual renewal rates, with renewal rates as high as 90%.
2. Revenue From In-Store Sale of Merchandise
Costco Wholesale makes huge profits by selling merchandise in its brick-and-mortar stores.
The company operates in domestic and international segments to provide customers with high-quality products and wholesale prices.
In the 2020 fiscal year, the revenue generated from the sale of in-store merchandise is estimated to be 91.78% of Costco’s total revenue.
- Food and Sundries: packaged foods, dry foods, groceries, snacks, alcoholic & non-alcoholic beverages, candy, and cleaning supplies.
- Fresh Foods: fresh produce (fruits and vegetables), meat, deli products, and bakery items.
- Softline: small appliances and apparel.
- Hardlines: major appliances, hardware, electronics, health & beauty aids, and garden & patio.
Apart from these distinct categories, Costco also makes money by selling items under its private label brand, the Kirkland Signature brand.
Costco introduced Kirkland in a bid to offer customers premium quality products at discounted prices and still support higher margins.
The company also offers a large assortment of goods under the Kirkland Signature brand, including clothing & luggage, home & kitchen, grocery, hardware, and office products.
More importantly, the brand commits itself to provide quality products to enhance customer retention and loyalty to Costco Wholesale.
Although the company generates thin profit margins due to its discounted prices, the rapid inventory turnover at the store makes up for the low margins.
3. Revenue From E-Commerce Sales
Costco also generates a lot of revenue from its e-commerce store, Costco.com, launched in 2001.
The company’s e-commerce website offers a higher number of SKUs (approximately between 8,000-10,000) as compared to its in-store inventory (approximately between 3,700-4,000 SKUs).
While Costco has more footprints in brick-and-mortar stores than in e-commerce, the company has experienced steady growth in online sales during the 2020 fiscal year.
The recent surge of online shopping and customer buying behavior has significantly contributed to Costco’s online demand growth.
4. Revenues From Ancillary Business
Besides the merchandise sales, Costco also earns money from ancillary businesses that encourage customers to shop more at Costco.
The ancillary businesses by Costco include pharmacies, travel businesses, gas stations, food courts, optical dispensing centers, and hearing-aid centers.
Costco believes that these ancillary businesses are essential strategies for drawing customers into Costco stores.
The belief is based on the assumption that customers who stop by Costco to pick up a prescription or buy gas are likely to explore what the store offers while at Costco.
Technically, these ancillary businesses are major traffic builders that help Costco to drive sales for the company’s core products.
The company also works in partnership with selected service providers to provide member-only values for homes and businesses.
Costco’s Home Services include (but are not limited to) the following:
- Costco Auto Program
- Auto & Home Insurance
- Bottled Water Delivery
- Identity Protection
- Pet Insurance
- Mortgage Purchase & Refinancing
The Business Services at Costco include:
- Payment Processing
- Business Checks
- Health Insurance Marketplace
- Business Phones
5. Co-Branded Credit Cards
Costco earns money through a co-branded credit card agreement with Citibank N.A.
In 2015, Costco signed an agreement with Citibank N.A. to authorize the bank as Costco’s exclusive card issuer.
As a result, Costco earns royalty fees whenever a customer uses a Costco Visa card anywhere. In this case, Costco can earn revenue whenever a cardholder makes purchases inside and outside of its warehouses.
Costco Wholesale makes money from its membership plans, the sale of goods and services, and co-branded credit cards.
The company maintains its revenue streams by its commitment to offer high-quality products to a loyal customer base.