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Business Model: Many Costco Members Don’t Shop At Costco All That Much

Costco (NASDAQ: COST) markets itself as a warehouse center at which, in exchange for a membership fee, consumers get access to many different food, merchandise   and services at discounted prices.

Of course, the company does provide those items, but that’s not really the chain’s business model. In lots of ways, Costco operates like a gym. It sells memberships understanding that many of its members won’t show up. It is not upset if they do and it takes care of its members that invest the most — however, in reality, it only needs customers to find the value of linking, not really have them do some shopping.

How does the gym version work?

Discount gym chains like  Planet Fitness (NYSE: PLNT) really market to individuals the company knows won’t show up. That is why the chain’s average fitness center has 6,500 members while only about 300 may be accommodated at any given time, NPR’s All Things Considered reported in December 2014.

Basically, when lots of individuals join a gym, they do this with the very best of intentions. They want to be healthier and get into better shape. Even since they rarely or never go, they stay members because the concept that they will someday become regulars.

The fitness center doesn’t have to serve that audience. Instead, it can focus on a smaller group of dedicated clients who workout most days and keep them happy, while also revealing less engaged members that the entire business does work, which keeps them from quitting.

Costco’s company works the identical way. Members are lured in by the prospect of earning money, and if they don’t take advantage, they renew since they intend to in the long run.

The chain makes about 75 percent of its profits and a big piece of the remaining 25 percent comes out of its customers who spend more than the normal member. The warehouse club makes money whether individuals come in or not, and its sales are only icing on the cake.

Can Costco make its money?

The chain uses low prices to lure individuals to pay $60 for its basic “Gold Star” membership or $120 for an Executive membership, which gives members 2% cash back on eligible purchases until they get $1,000 back. Either membership gets people in the door but Costco understands that only Executive members are likely to take advantage of its reduced prices.

During the series’s earnings calls each quarter, CFO Richard Galanti notes the expansion in Executive memberships. Then he points out that about one-third of its clients pay the higher price to join, but they account for two-thirds of sales.

Costco closed Q3 with 18.3 million Executive members that generated roughly $20 billion of its $28.2 billion total sales, excluding membership prices. Its 37.8 million Gold Star members accounted for only about $8 billion.

That is math that is rough, but it shows a clear disparity between the two classes of participants of the warehouse club. The data shows that roughly $ 211 each, Gold Star members spent during Q3, while Executive members averaged $ 1,092 though the figures are not exact.

It’s All about memberships

Costco is not currently selling goods and services. It’s using those things to get people to buy memberships. Gold Star members shop in the chain often enough to find the value of renewing, but probably not often enough to create staying a member.

That’s a danger for the chain, but as consumers will pay $10 per month to keep the illusion that they might visit World Fitness, they’re ready to do the same. Costco offers the guarantee of spending money, and to get a large percentage of its viewers, that is sufficient to keep them hooked.