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Business Model Costco Members Don’t Shop At Costco

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

Of course, the company does offer those items, but that’s not actually the series’s business model. In lots of ways, Costco operates like a gym. It sells memberships. It is not mad if they really do — and it handles its members that invest the most — but, in fact, it needs customers to find the value of joining, not have them do any shopping.

Does the gym model work?

Discount gym chains such as   Planet Fitness (NYSE: PLNT) really market to people the provider knows won’t show up. That the average gym of the chain has 6,500 associates while only about 300 could be accommodated at any given time, NPR’s All Things Considered reported in December 2014.

Essentially, when many people join a gym, they do so with the very best of intentions. They want to be more healthy and get into shape. They stay members since the idea that they will become regulars as they go.

The gym doesn’t need to serve that audience. It may focus on a group of loyal customers who keep them happy and work out many days, while revealing members that the whole business will.

Costco’s company works the same way. The prospect of saving money lures in members, and even if they don’t take advantage, they renew since they intend to in the future.

The series makes about 75 percent of its profits from subscription fees, and a bit of the remaining 25% comes from its clients who spend more than the member. Just like a gym, the warehouse club makes money not or if people come in, and its sales are just icing on the cake.

Can Costco make its money?

The series uses low costs to entice individuals to pay either $60 for its basic “Gold Star” membership or $120 to an Executive membership, which provides associates 2 percent cash back on eligible purchases until they earn $1,000 back. Either membership gets people in the door but Costco understands that Executive members are very likely to take substantial advantage of its reduced rates.

During the chain’s earnings calls each quarter, CFO Richard Galanti notes the expansion in Executive memberships. He then points out that they account for two-thirds of earnings, although that roughly one-third of its customers pay the price that is higher to join.

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

That’s math that is rough, but it shows a clear disparity between the two classes of participants of the warehouse club. Even though the figures aren’t exact, the data shows that during Q3, Gold Star members spent roughly $211 per year, while Executive members averaged $1,092.

It’s about memberships

Costco isn’t currently selling goods and services. It is using those things to get people to buy memberships. Gold Star members shop at the chain enough to see the value of renewing, but probably enough to make staying a penis.

That’s a danger for the chain, but they are ready to do exactly the same with the warehouse bar, as customers will pay $ 10 per month to keep the illusion that they may visit World Fitness. Costco gives the promise of spending money, and to get a huge percentage of its audience, that is sufficient to keep them hooked.