Costco Business Model Analyzed And Explained

Editorial Team

Costco Business Model Analyzed And Explained 

Despite rising competition, yearly reports disclose that Costco Wholesale Corporation keeps growing. The growth proves that the Costco Business Model remains relevant in the current economic space.

A Brief Background Of Costco 

Costco is owned by Costco Wholesale Corporation, headed by W. Craig Jelinek, who has been the current CEO of the business franchise since January 1st, 2012. The corporation is an American multinational which operates a chain of large membership-only retail stores. Currently, Costco is one of the world’s largest retailers, where all critical decisions are jointly made by the CEO and major stakeholders at the company. Launched in 1983 in Seattle, Washington, the retail outlets have grown to over 800, with the majority located in the US and the rest spread internationally.

What Is Costco’s Mission Statement? 

Costco Wholesale Corporation’s mission is to continually provide its members with top-quality products and services at low, competitive prices. The company’s primary emphasis is on quality and pricing.  

What Is A Business Model?

A business model is more than a company’s plan for making money. It describes the rationale of how a company generates, delivers, and captures value. An efficient business model is much more comprehensive and involves identifying customer segments, key partners, shipping, and delivering value to customers. Business models include a company’s activities linked to production, such as supply, design, manufacturing, or raw material. It also provides product distribution, and service delivery facilitates a company to find its audience, and supports closing a sale.

Generally, a business model defines how a company delivers value to its clients, entices them to pay for that value, and converts that payment to profit. It presents management’s theory of what customers want and how a company can strategize to best meet those needs, get paid doing it and make a profit while at it.

What Is Costco’s Business Model?

Costco’s business model is a cost-effective distribution model with limited but high-quality products. The model is only available to customers with membership, allowing them to purchase a wide range of products at discounted rates. This model’s main idea is to encourage higher sales by providing its members with low yet competitive pricing on limited but top-quality products.

Costco’s Business Model’s strategy is to offer its members low, competitive pricing on selected products. With this strategy, they draw in more customers, which is also a tactic that helps in maintain existing customers. The company also uses this strategy to sell slow-moving products by offering special deals and bargains. 

Business Model Objectives 

A business model is a company’s strategy, including value proposition, target audience, organizational structure, workflows, and operational processes. A business model’s objective is to: –

  • recognize a product or service, 
  • identify who needs it and how they will get it, 
  • analyze the expenses involved,
  • study production and sales processes. 

Business model objectives should reveal who a company’s customer is, what value the business is adding to the customer, and at what price.

What Products Do Customers Get At Costco?

Costco purchases products directly from manufacturers and offers the same products to its members at a lower rate than its competitors. The company’s core merchandise includes: –

  • Food – both perishable and non-perishables, including groceries, dairy products, grains
  • Health and beauty products
  • Beverages – soft drinks, liquor
  • Kitchenware
  • Houseware

The business also offers ancillary products and services such as tire installations, gasoline, pharmacy, bakery, or delicatessen services where you can get mouth-watering meals.

How Does Costco Make Money?

Over time, Costco has effectively diversified its income streams by exploring multiple investment opportunities. Besides selling products to its members at discounted rates, Costco has other sources of revenue, including: –

1. Membership Fees: 

You must be a registered member to enjoy Costco shopping benefits. This business differs from other conventional businesses as you have to be a member to enjoy the bargain prices on offer. There are different categories of membership fees as the company runs a tier system with varying membership packages.

Currently, there are four tiers to choose from, and they include the following:

  • Executive Membership 

Executive membership comes with two household cards that can be highly beneficial when members engage in strategic shopping. Suppose you spend $5,000 annually on qualified purchases in electronics, groceries, or furniture; in that case, you’ll get a 2% reward of $100. To join the executive membership, you must purchase a Gold Star Membership and upgrade your account. You may consider choosing to upgrade in one of the following ways:

  • You can start by signing up and registering online at the company website. Once your account is verified, you can easily upgrade your membership.
  • You can also contact them on the phone and talk to a customer care rep.
  • Or, you can visit their premises and upgrade from there.

Other benefits you get from an executive membership include the following:  

  • A free household card
  • An annual 2% reward on Costco purchases
  • Benefits such as competitively low pricing on Costco services
  • Valid at all Costco premises worldwide

Expect to get a 2% reward certificate mailed with the renewal notice two months before your annual renewal date. You must be an executive member when the reward is issued to get the certification. If you reverse your executive status, you will lose all accumulated rewards as the bonuses aren’t prorated.

Only purchases made by primary and active primary household cardholders on the account will count towards a reward. Refunds of eligible purchases will be subtracted from the 2% reward.

  • Business Membership 

            This category mainly benefits small and medium-sized businesses as it exclusively helps entrepreneurs buy products for business, personal use, or resale. To qualify for a business membership, you must have a business license, produce evidence of business ownership, or have a business ID. This will give you eligibility allowing you to collect points and earn rewards by shopping at Costco. The membership comes with two cards with the option of adding cardholders for an additional $60 annual fee. Other benefits include: –

  • Valid at all Costco outlets worldwide
  • A free household card
  • Members must provide Costco with suitable resale information
  • Make purchases for resale.
  • Gold Star Membership

This membership category caters to the needs of individual customers who want to benefit from the great bargains the company offers. It can accommodate two people over 18 living at the same address. The membership entails the following: –

  • $60 annual membership fee
    • A free household card
    • Valid in every Costco outlet countrywide.

Unlike its competitors, Costco has managed to find a way around its membership requirements being a barrier. Due to this, the company has managed to amass over 100 million members. The company’s membership fee accounts for part of the company’s annual income.

To try and entice new prospects to join Costco, they offer selected items on their website to members only. Known as member-only items, they hide the item’s price from non-members.

Costco makes more than its competitors because people are more likely to shop due to their financial investment in membership fees. Customers feel they have to get their money’s worth, which inspires them to shop more. The membership aspect encourages them to make more trips to Costco than if they weren’t paying for that membership.

2. Bulk Merchandise Sales

A considerable percentage of Costco’s income stems from selling bulk merchandise from electronics, health & beauty products, automotive spare parts, houseware, furniture, appliances, etc. You can also get fresh food, including meat and groceries at reasonable rates. Though Costco charges customers to shop, there are benefits when customers buy from them as products are sold in large quantities and at affordable rates.

3. E-Commerce Stores

Due to competition from Walmart, Amazon, and others, Costco had to launch an e-commerce store with a competitive delivery program to counter the competition. In April 2001, it launched its e-commerce platform to help its members shop without physically visiting the company’s warehouse. 

In 2017, the company launched CostcoGrocery, a service that provides a two-day delivery on approximately 500 non-perishable items with a free shipping offer on orders over $75. It also has expanded its same-day online delivery program for commodities, including perishables, to more locations by partnering with Instacart.

4. Home Installation Program

Costco gets a steady income stream by offering its members varied home and installation services like HVAC, countertop, flooring, and carpet installations.

5. Automobile Sale Program

The company has partnered with multiple car dealers to enable members to purchase new and used vehicles through a unique program at discounted rates. All Costco members can make substantial savings on their next vehicle purchase. Members can also save up to 15% on spare parts, automobile service, and accessories.

 Advantages Of Having A Costco Membership 

1. Members Make Purchases At Discounted Rates 

All Costco members can access multiple benefits, like discounts on selected items. There are additional benefits if a member upgrades to become an executive member. The company’s unique business model offers wholesale pricing on its products, making it the better option for price-conscious customers. 

  • Discounts On Clothing 

Suppose you’re looking for casual, sports, or official wear. In that case, whether for men, women, children, or unisex, you can find a great selection of a wide-range variety at Costco’s clothing collection. You can access men’s underwear, socks, shirts, jeans, and jackets. And, if you’re looking for office wear, there are varied good quality shirts and pants that you can sample.

You can also find a great collection of women’s clothing that includes blouses, shirts, dresses, and attire for all occasions. Costco has a signature clothing line and also stocks items from established brands like Calvin Klein or Tommy Hilfiger, giving you a more comprehensive selection range. If you’re a shoe lover, you’ll not miss getting something from established brands like Adidas, Nike, or Kirkland.

Whether you want to buy clothes for yourself or for your children, Costco sells billions of apparel each year. Usually located in the middle of the store, the clothing section consists of dozens of tables with garments piled on each other.

  •  Travel Discounts 

Through Costo travel, customers get offers of bargains and fantastic discounts, but only from Costa’s travel partners. Additionally, members get helpful information on vacation packages, book car rentals, cruises, or hotels, and also get to compare Costco’s rates with other service providers.

  • Grocery and Food Discounts 

Costco is widely known for its great discounts on households, groceries, and food items. The company partners with Instacart in some areas to ensure same-day delivery, especially for perishables.

  • Discounts On Medication and Pharmaceutical Products

Costco offers its members the Costco Membership Prescription Program at no extra charge. A significant benefit associated with this membership includes lower rates on prescription purchases. 

Getting your prescriptions at a Costco pharmacy is excellent, as you get your drugs at cheaper rates than other pharmacies. But you cannot use it together with your health insurance.

  • Discounts On Furniture and Home Appliances 

Whether you need a TV, new chairs, a blending machine, or an installation on significant appliances, you’ll be sorted out with a Costco membership. Besides getting fantastic bargains, you also get delivery services and a two-year warranty. You’ll need to keep up with their website as they constantly share offers on selected items.  

  • Discounts On Household Products

Through Costco, you can remodel your house, install new shelves or re-carpet floors at competitive rates.

  • Discounts for Printing Photos

Costco has a photo center where you can print photos, make enlargements, or print posters. Other available printing services include:

  • Whether you’re looking for single or multiple-panel canvas prints for decoration, they are available at a cost starting from $28.99.
  • Stunning metal prints starting from $33.99
  • Acrylic prints with museum-quality acrylic that add depth and radiance to images start at $43.99
  • Digitize your home videos and photos by transferring them to video, images, film, and slides. The charges start from $19.99
  • You can download the Costco app to auto-create books from your phone or do it online. The cost starts at $39,00
  • Create personalized greeting cards with your favorite photo. For every 50 cards, you will pay $13.99
  • Create 13 oz vinyl banners available in three different sizes at $24.99
  • Other printing services include personalized calendars and ornaments starting from $9.99 each, 4×6 printouts starting from 11¢, high-gloss photo plaques beginning from $9.49, and photo mugs from $8.99.
  • Automobile Discounts

You get great discounts on new or second-hand vehicles with a Costco membership. The company offers an auto program that connects its members to vetted local car dealers and offers pre-arranged prices for Costco members. Members also get car accessories like tires with a five-year road hazard warranty, batteries, and other vehicle spare parts. They also get car-related services like balances, nitrogen tire inflation, balances, etc.  

  • Insurance and Health Discounts

Costco provides home and auto insurance discounts to its members in conjunction with American Family Insurance. It also offers discounted insurance to safe drivers and students through CONNECT. Other benefits include life insurance, health & vision insurance, and other available options for business owners. It also has a package for pets.  

2. Costco Anywhere Visa Card 

Costco Anywhere Visa Card consists of a credit card with an excellent rewards program where members get: –

  • 2% cash back on eligible purchases from Costco,
  • 3% refund on restaurants and eligible travel purchases
  • cardholders get a 4% on eligible gas purchases per year,
  • 1% cash back on any other purchase.

Please note that your membership must be active to benefit from the reward program. You can use the rewards to make purchases or exchange them for cash. Other credit cards you can use to shop at Costco include:

  • Wells Fargo Cash Card
  • Chase Freedom Unlimited
  • Chase Sapphire Preferred Card

3. Risk-Free Membership 

The membership offers customers the option of claiming a refund if dissatisfied with the company’s service. The fact that members can return goods and claim refunds increases customer confidence in the brand’s exposure.

4. Reward Program 

Costco’s Executive Membership Reward Scheme, which allows members to claim up to $750 annually in reward points, has proven to be a strong selling point for the company.

Comparison Between Costco’s Membership And Other Wholesale Warehouse Memberships

You can determine the pros and cons of Costco membership by comparing it to other businesses offering a similar service. For instance,

  • Sam’s Club’s Basic Membership costs a yearly charge of $45, but unlike Costco, it doesn’t include pharmacy discounts, optical savings, or free online shipping. You’ll have to upgrade to the plus membership at a $110 yearly rate to get additional benefits.
  • Kroger offers the tied program, which provides two membership options for an annual fee of $59 or $99. All members get free delivery on online orders of $35 or more and double fuel points of up to $1 per gallon of gasoline.
  • BJ’s Inner Circle Membership will cost you $55 annually and includes one membership per household with the option of adding members for an extra $30annual charge. Currently, the membership is going for a $25 discounted rate for new members. Other benefits include a 25% discount on groceries and significant gas savings. The company accepts manufacturer’s coupons and offers the Perks Reward Membership at a yearly charge of $110 and a 2% cash back on purchases.

Other Competitors Include: 

  • Amazon operates internationally and ships to many locations worldwide. Its membership rate is $14.99 monthly, $139 yearly, and a prime video membership is $8.99 per month. The company has a Prime Student Membership of $7.49 per month or a yearly fee of $69
  • Walmart has an annual membership of $98 or a $13 monthly plan. If interested, you can start with a free 30-day trial membership to determine if it’s a good fit.
  • Target offers a service that predominantly caters to the US market.

Customer Relations 

Costco maintains its customer engagements through:

  • The membership warehouse club
  • Social media
  • Email
  • In-person customer care support service.


Costco Wholesale Corporation’s business model is built around offering affordability to its members. The company ensures steady growth through its effective business strategy that seeks to retain customers through its enticing membership programs.