Costco is an American multinational company that is one of the biggest retailers in the world. They are a bit different from other grocery stores, in the way they function and operate. The retail market is highly competitive, and Costco has managed to stay relevant for a very long time. This means that their business model is effective, and a good one. In this article, we will explain what exactly this business model of Costco is, and how Costco works through it.
Business Model of Costco
Costco has a mission statement, something that says a lot about its strategy and business model. This mission is to provide their consumers with good quality goods and services at affordable prices. This is in line with what any rational consumer will want – good quality and low prices.
Their business model is to operate on a membership-only basis. This means only those who have taken up a membership plan with Costco can purchase items here. Without a membership or someone who is a member, a person cannot even enter a Costco warehouse.
Every member needs to pay their membership fee dues to keep being a member. They have different membership plans, so each customer can choose what is convenient for them. Costco’s strategy is to maintain a loyal customer base by keeping its prices as low as possible.
There are some retail firms like Walmart that are popular for having low-priced items. Costco differentiates itself from such chains because of its membership strategy.
Positive Things About Costco’s Model
Costco offers goods and services that are priced lower than what they are available for in other stores. So if they have constantly low prices, the question of their profit arises. Sellers cannot make a proper profit if they sell at low prices, which is why most need to keep their prices higher.
Costco makes a large number of sales, which is how it can hit a good profit margin with low costing goods and services.
This high number of sales ensures that Costco has high operating efficiency, keeping variable costs on the lower side.
Having a membership at Costco keeps customers loyal to it, and this works as a brilliant strategy that has kept the company afloat all these years.
Negative Things About Costco’s Model
Though it ensures Costco’s unique place in the market, its compulsory membership policy is a drawback. It sustains the company, and they depend a lot on the membership fees for their profit.
It greatly limits the number of customers that Costco can get. A lot of retail organizations make a good part of their sales by chance.
If someone is walking home and suddenly remembers that they need to buy soap powder, they cannot hop into Costco for a moment to buy it.
They need to have a membership, and if they don’t, Costco loses a potential customer there. The pros and cons of this business model can be debated on and on.
It has worked for Costco, but there is still a possibility that they might be bigger without the membership condition.
What Is Costco Best For?
As a customer, what does one expect from Costco? It is expected that Costco will stick to its mission statement. Good quality products, a wide range of products, affordable prices.
Except for this, Costco is known for offering goods in bulk. Costco is a warehouse after all, so it is more viable for those who have large families or need bigger quantities of goods to shop at Costco rather than those who are shopping for one or two people.
Costco is a good place to take the whole family out on the weekend. Your grocery bill will certainly be less like this. However, if you do not need large quantities, shopping at Costco might be a wasteful experience for you.
Costco offers a wide variety of products. They have huge warehouses where one can find everything from a Snickers bar to electronics to furniture.
You can walk into Costco with your long grocery list and be assured that you will find everything on it – unless it is sold out! As mentioned before, Costco has a high sales volume and their products get sold out fast.
Going at times after they restock will be a good idea, as everything they have will be available then.
Conclusion
Costco’s business model works with two main things; keeping their prices as low as possible and using memberships to gain profit. Their membership costs anywhere from $60 to $120 annually, depending on which plan you choose.
It is a compulsory annual membership, so customers are likely to go only to Costco warehouses once they have paid for it. Going to other stores when they have already spent quite a sum on membership would just be a waste of money.
Like this, Costco has garnered a host of loyal consumers that love its bulk purchases and reduced prices. This strategy has worked brilliantly for Costco, and they remain one of the most sought-after retailers.
