Costco has established itself around the world as an incredibly low-priced retailer of a variety of goods. But, have you ever wondered how it manages to be so cheap?
From avoiding advertising to tackling theft, Costco’s business model is geared towards driving down costs and keeping prices low. Keep on reading to discover the 13 reasons that allow Costco to be so affordable!
11 Reasons Why Costco Is So Cheap!
1. A Consistent Bare-Bones Store Design
If you’ve ever been to a Costco location, you will have noticed that there is a reason the stores are called ‘warehouses’ – their design is simple and includes only the most essential features.
In fact, Costco warehouses make great use of daylight to illuminate the inside of the store during the day, saving on a lot of utility bills.
Through these efforts, Costco is able to keep its operating costs down and thus pass on the savings to customers through lower prices.
2. Annual Memberships Bring Most Of The Profits
Costco has a membership-based business model, i.e. customers can sign up for a yearly membership (for a small annual fee) that entitles them to a range of daily and monthly discounts, as well as special members-only cards.
Since most customers become members to take advantage of low prices, over 50% of Costco’s annual profits come from these membership earnings, and this, in turn, allows it to reduce its costs even more.
3. Costco Does Not Do Any Advertising
There is a reason you don’t ever see a Costco advertisement on any digital or physical media. Costco simply does not put any effort into advertising and relies primarily on word-of-mouth advertising to increase its customer base.
Consequently, it saves up massive amounts of money that would otherwise be spent on advertising campaigns and uses this money to lower the prices of its products.
4. Narrow Range Of Product Categories And Variants
Even though the sheer size of Costco warehouses gives the impression that Costco sells a huge variety of products, the reality is quite different.
Costco sells a narrow range of product categories and variants and buys these in massive bulk quantities from manufacturers, paying very low prices upstream. This allows it to price the products at lower-than-average rates.
For example, you would find bundles of only one size of toothpaste at a Costco warehouse instead of all the sizes manufactured by the toothpaste producer.
5. Very Little Mark-Up On Products
Retailers buy products at a certain price from manufacturers and earn profits by marking up this price for end-users. Costco, however, raises the prices by a small margin only, cutting down on its own profits to give customers more savings.
In the bigger picture, this does not hurt Costco much because it covers up these lower profits through the membership fees its members bring in every year.
6. Costco Deals With Theft Quite Effectively
Theft of goods accounts for a huge proportion of losses for a number of major retailers around the world. Costco deals with this quite effectively by implementing anti-theft strategies that keep its losses (and therefore costs) down.
These include keeping a single entry and exit point for the warehouse and having store employees check receipts of customers leaving the store to catch potential cases of theft.
7. Costco Keeps Its Employees Happy
Retail chains spend a lot of money on hiring, retaining, and firing employees. However, Costco is well known for keeping its employees happy by offering a high $15 an-hour minimum wage along with various benefits such as healthcare insurance.
By doing so, it avoids costs associated with continual hiring (and firing) and thus passes on the savings to customers.
8. Costco Has A Very Efficient Supply Chain
One of the major reasons for Costco being so affordable is the efficiency of its supply chain.
Costco puts a huge emphasis on reducing the number of ‘fingerprints’ on its products, i.e. reducing the number of middlemen before a product reaches the end-user after production.
Using cross-dock distribution facilities, Costco significantly reduces the costs associated with getting a product from the manufacturer to the customer, lowering the price of the product.
9. Low Food Prices Keep Customers Buying For Longer
If you’re a Costco member, you must have felt surprised at the ridiculously low prices of food items sold inside Costco locations. For example, an 18” pizza and a can of soda cost only $10 and $0.69 respectively.
Costco intentionally keeps these prices so low since food items are ‘loss leaders’ – they bring in losses but have the indirect effect of keeping customers inside Costco warehouses for longer.
This way, customers end up buying more high-margin products that nullify the loss brought in by the low-priced food items.
10. Costco Has Its Own Low-Cost Private Label Brand
Costco has its own private label brand named ‘Kirkland Signature’ with products that are priced significantly below similar products sold by other brands.
As reported by The Wall Street Journal, these products are introduced by Costco whenever it finds that a product is being sold for more than the lowest possible price by other brands.
Over the years, Kirkland Signature has become a popular brand among Costco customers.
11. Gas Stations Are Located Next To Warehouses
Costco intentionally locates gas stations next to warehouses and stores to entice people who only wanted to buy gas to visit the warehouse and purchase several other items in the process.
Because of this, Costco ends up selling a greater volume of goods (that have a higher profit margin than gas) and so is able to finance its lower-cost incentives and discounts.
12. Costco Buys High-End Non-Perishables On Consignment
Managing the inventory of high-end non-perishable goods like electronics is expensive, so Costco deals with this problem by buying these items on consignment.
This means that Costco only owns the inventory (or stock) of these goods once it is actually sold, avoiding any costs associated with handling and maintaining inventory.
To learn more, you can also see our other related posts on Costco’s target market & demographics, and why Walmart, and IKEA are so cheap!
Conclusion
Costco’s primary competitive advantage compared to other retailers is its affordability and cheap prices, and it maintains this by reducing its costs as much as possible across all its operations.
It shuns all kinds of advertising, keeps its stores simple, eliminates theft, leverages bulk discounts, and optimizes its supply chain so that it can acquire products for as low a price as possible.
In turn, it passes on a large part of these savings to its customers, earning its profits primarily through the annual membership fees paid by regular members.
