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.
Low-cost model
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.
Inventory management
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.
Psychological factors
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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FAQs
Why does Costco charge an annual membership fee? We strive to give our members the best products at the lowest possible prices, and our membership fee allows us to offset many of our operating costs and price our merchandise lower.
Why Costco membership is not worth it? ›
The entry-level cost of joining Costco is $60.00 per year. If paying the 5% surcharge on your purchases is less than $60, it would not make sense for you to join Costco just to avoid it. You'd be better off doing your online shopping as a non-member and paying the slightly higher prices.
Why did Costco charge me $120? ›
Check out the example below for what may appear on your bank statement: A $60 charge is for a standard Gold Star or Business Membership while a $120 charge is for an Executive Membership before applicable sales tax.
Why does Costco charge membership fee? ›
Membership means Costco shoppers belong to a "private" club. Also, the fee motivates action: the money's been spent, so it's best to use the club's advantages. This thinking gives Costco its most powerful advantage: customers become loyal to the store.
How much is a senior membership at Costco? ›
There's much to be gained by getting a Costco membership when you're older. Unfortunately, though, Costco doesn't offer senior discounts. You'll need to prepare to pay $60 for a basic membership or $120 for an Executive membership. You may find, however, that the savings you enjoy can more than make up for those costs.
What are the negatives about Costco? ›
They Keep Changing Up Merchandise
While some Costco shoppers consider it a benefit to experience new and different merchandise every trip, some shoppers are frustrated that Costco doesn't always carry the same brands every month. Just when you start loving an item, it vanishes from store shelves.
Do you really save money with a Costco membership? ›
If you fill up your car with gas at Costco once or twice a month, the gas savings alone would cover the cost of your membership fee. But if you don't live close to a Costco and don't go often, or can't find anything you want to buy when you get there, then you may not end up with $60 in savings.
Is Costco cheaper than Walmart? ›
Because it has such a limited selection spread across a large, global operation, Costco has incredible leverage even compared to massive rivals Walmart (WMT) , Target, Kroger, and Amazon. That, however, is only part of why the warehouse club chain can offer lower prices, in most cases, than its rivals.
What is Costco's theft rate? ›
Costco's robust defenses
Costco has managed to keep a lid on its level of shrink. Galanti told the Daily Mail after the earnings call that the company's shrinkage rate was between “0.1% and 0.2%,” according to its data at the time. That's significantly lower than the nationwide average of 1.6%, as reported by the NRF.
How to get a free Costco membership? ›
Costco doesn't offer free or discounted memberships, but rest assured that the cost of membership can be recovered quickly thanks to massive price savings once you start shopping.
When your membership fee benefits you. Over the past year, Costco brought in almost $4.6 billion in membership fees. And those fees represent 72% of the company's profits.
Is Costco or Sam's better? ›
Costco is a publicly traded company, while Sam's Club is a subsidiary of Walmart. Costco's membership fees are more expensive and the prices of basic products at Sam's Club are generally cheaper. Costco has more stores worldwide, but Sam's Club has more stores in the U.S.
What is the difference between the $60 and $120 Costco membership? ›
Costco has two main membership levels: Executive, which costs $120, and Gold Star, which costs $60. Executive membership gives you a 2% return on qualifying Costco purchases and discounts on services. If you spend $3,000 annually, or $250 per month, at Costco, it's worth upgrading to Executive.
Is Costco free for seniors? ›
How Much Is A Costco Membership For Seniors? Unfortunately, since April 2022, Costco has ceased to offer discounted memberships for seniors (according to Kiro7). Both the Gold Star and Executive memberships cost the same price for everyone, regardless of age.
Is there a senior discount at Costco? ›
Whether you want to buy furniture, appliances, a new TV, or other big-ticket items, Costco can help people save money at every stage of life. Costco does not offer "senior discounts." But the same low prices that Costco offers to all shoppers can be an especially good value for retirees on a budget.
How do I get a $30 Costco membership online? ›
Join as a new member and enroll in auto renewal of your annual membership to receive a
- Join as a new member and enroll in Auto Renewal.
- Enter Promo Code MOVER at checkout.
- Receive your Digital Costco Shop Card.*
How much you'd need to spend to make Costco Executive Membership worthwhile. In order to receive $60 in reward dollars and recoup the $60 more that an Executive Membership costs, one must spend $3,000 over the course of the year at Costco on eligible purchases, an average of $250 a month.
Is Costco membership worth it for one? ›
Families and couples may have an easier time benefitting from Costco's bulk prices. A membership may be worth it if you're single and cook a lot. You can also enjoy perks like exclusive travel packages, affordable electronics, and low-cost apparel.
