Costco: When Breaking The Rules Pays Off

When Costco (“Price Club” at the time) opened over 40 years ago, they were the first of their kind. They bought a warehouse with the idea of creating a store for businesses to shop at. A novel idea. Even further, they required their customers to pay just to shop in their store. At first, the business was a complete disaster.

“The small businesses didn’t come. They didn’t spend money and we, after a relatively short time – maybe a few weeks – were basically going bankrupt.”

Founder Robert Price

Once the store opened their doors to the public (not just business owners), things began to turn around. In 2014, Costco made $112.4 billion in revenue.

According to every business model up until that point, Costco was doing everything wrong. The stores are huge and uninviting. There are literally people paid to wait at the front door ready to deny you in absence of a membership card. Once inside, the store is grossly inconvenient. There are no signs anywhere directing you to what you are looking for. Even though there are bulk items priced at a lower range, the selection is weak.

What is it about Costco that allows them to defy all universal marketing rules?

Let’s begin with the membership fee. Who would actually pay money to shop in a store? Well, as it turns out- a lot of people do! When customers sign up for the membership, they spend the extra cost upfront in order to save money on deals in the future- a simple concept. What goes on behind the scene, however, is much more complex. Firstly, being a “member” of a club gives people a subconscious sense of pleasure. Being accepted into a place where others get denied feeds our desire of higher social status. Beyond that, membership fees are known to economists as “sunk costs”, another mind game in which you feel as though you must spend more money in order for the membership to be worth it. Completely illogical but an almost unavoidable feeling.

From there, we have the chaos of the store. Unorganized and difficult to navigate. While most convenience stores aim to be- well- convenient, Costco ensures that none of their customers just pop in to buy a couple items. Costco figures that it is much more cost effective to have customers that come in a few times and buy many things than having to constantly wait on frequent customers. The build of the store ensures that customers are almost forced to walk down every aisle to pile up their cart, nudging them to be more cost-efficient consumers.

Selling items in bulk is cost effective for obvious reasons. Having fewer options in large quantities saves the store a ton of money. Instead of paying workers to hand stock every box, a forklift can do it in a fraction of the time. These savings are passed onto customers and everyone wins.

“But if you go to Costco- those products are driven by forklifts, so [employees are] not touching individual items. They’re touching a pallet. It’s just quantum difference the labor factors.”

Founder Robert Price

Instead of offering a customer-driven business, Costco decided to focus entirely on minimizing costs. After recognizing their success, many others have followed suit with their business models in hopes of prosperity. Online companies such as Jet have recently jumped on board in attempt to extend this to the online frontier. Only time will tell if they will be able to succeed.

Leave a Reply

Your email address will not be published. Required fields are marked *