How does Costco make money? The genus business model

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Written By Soliu

 

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If there is any organization that sell products at a more cheaper rate than what you will find anywhere else, then it’s Costco. This will therefore, makes one to ask the question, ‘how does Costco makes money?’

Informatively, Costco is the second-largest retail business chain in the world — behind Walmart, when measured by how much it generate as annual revenue.

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In fact, Costco is larger in revenue generation than the two European retail chains; Aldi and Carrefour.

While Costco is not what it is today because of the scale of its operations, the company is known for what it is today because of its genus business model.

It ability to make money from different unpredictable sources. Even though the company claimed that its customers satisfaction comes first.

More so, the gigantic Costco differs and distinct from its competitors in such a way that it uses a fantastic business model that is based on membership fees. 

The business organization retail warehouses are majorly available to its paying members only. It’s not a free ride.

As such, Costco generates 90% of its business revenue from membership fees only. In return, it offers highly affordable and impressive products to its members.

What is Costco Corporation?

Costco business enterprise or Costco Corporation, which is popularly known simply as Costco is an American multinational business organization which operates a warehouse club.

Being a membership-only big-box chain of retail stores, Costco is operating in over 850 or thereabouts warehouse clubs globally.

It was established in 1983 by two businesses minded individual; James Sinegal and Jeffrey Brotman. Ever since, the business has been moved up to the 14th largest company (by revenue) in the United States.

How does Costco make money?

How does Costco works?

There’s no hard and fast rule on how Costco works. The company only have a unique business model known as membership-only.

That is to say, to shop at any Costco establishment, shoppers must have acquired a membership status from the company.

Hence, such registered shopper will hold an annual membership to the “club”, as such, he’ll be able to purchase anything in bulk from Costco at discounted wholesale rates.

What is the Costco revenue and genius business model?

Costco international business organization makes money via a few revenue streams that the company combine to established a stable and free flow income.

 These revenue models include: 

  • Transaction based business model
  • Mergers and acquisitions (M&A) business model
  • Membership business model
  • B2B2C (partnerships) business model

How does Costco make money?

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Having opened your eyes to what Costco is all about, how its operates, and its genius business model, it’s high time to answer the question: ‘ how does Costco make money?’

Well, with Costco recording over 105.5 million members across the globe and 810 warehouse club worldwide, it must definitely make enough of money. 

Now, let’s take a look at how Costco make money to be ranked in the top 5 largest economy of the world.

Well take a full, in-depth analysis of their three (3) main revenue streams and how much the company charge for its services.

1. Merchandise Sales (In-Store)

Much as being said earlier about Costco being of the largest retail business chain in the world behind Walmart. Thanks to its steady revenue stream.

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Costco makes the substantial part of its income from its in-store merchandise sales. Remember that there are over 800 warehouses club in Costco name worldwide.

Each one of these warehouses sells goods and products in the category of Food and Sundries, Fresh Foods, Hardlines, Ancillary and Hardlines.

In 20202, about $153 billion (that is 91.78%) of Costco’s overall revenue of $166.7 billion dollars came from the merchandise sales (in-house), huge, isn’t it?

According to Statista, each Costco warehouse earns 192 million dollars or thereabouts per year. Now, imagine the figure the whole 810 warehouses will pull.

2. Membership Fees

On like other retail chain business, Costco generate additional revenue stream from the membership fees its customers pays as a yearly subscription.

To fully take advantage of Costco wholesales deal, every Costco customer (both new and old) need a membership license.

Despite that, people keep flooding and partnering with the company. And to date, the incredible Costco has over 105.5 million active members that patronize it.

To clear your doubt, in 2020, as huge as Costco members and customers is, the membership fees they paid annually only made up 2.1% of the company’s overall revenue.

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The Costco membership forms or registration is in two fold. One for the ordinary members and the other for the VIPs.

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They are:

  • Costco Gold Star Membership: $60 per year 
  • Gold Star Exclusive Membership: $120 per year

3. E-commerce Sales

With the look of things and coming of industry 4.0, e-commerce will soon take over from the offline brick and mortar marketplace and stores.

Therefore, Costco is not left behind as the company have been using the its online market store to rake in millions of dollars every year.

That is to say, Costco is also generating massive income using another fantastic revenue model by way of e-commerce sales.

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In April 17, 2001, Costco began selling products online via its e-commerce website. Almost every service the company offers offline can be engaged online too.

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The online store, therefore, house products that worth on average 8,000 to 10,000 SKUs online. This is way larger than its 3,700 offline or in-store inventory.

Summary

Costco is the second-largest retail business chain in the world — behind Walmart, when measured by how much it generate as annual revenue.

From the foregoing, one will come to the conclusion that for bargains and bulk buys, Costco is the best place to go. Even though some may think otherwise if its membership really worth the price.

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Lastly, there is nothing anywhere again that is so special about Costco revenue model other than the three (3) discussed above.

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Thus, the question how does Costco make money has been laid to rest. Whatever your reason for embarking on this query, be rest assured that Costco operates an international recognized business model.


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