Costco Wholesale ( COST) is a Big-Box discount retailer that is only for members is charged $60 annually for the cheapest membership which is that of the Gold Star. At $120 per year, Executive membership comes with extra savings, perks and benefits, in addition to cashback on purchases that are eligible. It may sound like a lot however Costco uses a subscription model due to three reasons. The psychology of the customer is an important factor in the effectiveness that the membership model has. Membership signifies that Costco members are part of an “private” club. The costco membership fees also drives actions: the money has been used, so it’s ideal to take advantage of the advantages offered by the club.
This approach can give Costco its greatest advantage that customers are loyal to the business. Once they have paid the cost and being a member, they will be more inclined to go to Costco as opposed to a store, which has no advantages.
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Reducing Shrinkage
Costco has come up with a method to discourage theft from its stores: they charge customers to shop. It’s unlikely that shoplifters pay $60 per year for the chance to take. Controlling entrances and exits and utilizing the membership model, Costco believes its shrinkage is “well below those of typical retail operations.”
Income Stream
In the volatile environment that is the business of grocery Membership fees are an income source that is stable. In the fiscal year of in 2020 revenues generated by membership fee was $3.54 billion. If you take into account that net income of around $4 billion, you will imagine why the business is dependent on membership fees in order to stay in business. The steady stream of fees for membership helps companies to maintain costs at an affordable level and draw more customers.
The revenue generated from membership fees is excellent. With the exception of a few minutes of time for employees, and the expense of the card as well as subsequent promotions managing your membership isn’t very expensive. In fact Costco’s billions in membership fees is almost exclusively profits.
The Bottom Line
Costco offers always low prices and an impressive customer base. With the company growing both internationally and domestically, and with profits rising every year and its sophisticated logistics system The company is poised to be a giant retailer that can compete with Walmart. A lot of Americans are of the opinion that Costco is a membership-only company that charges fees to pay for cash however, direct profits are only one of three main reasons.