The shelves and aisles at every Costco store are full of thousands of items, but did you know that just one item helps Costco make billions of dollars per year? Costco still wants to sell you hot dogs, groceries, toilet paper, furniture, appliances, and other big-ticket items, but the store makes a major amount of revenue just by selling one thing: memberships.
That’s right: if you buy a Costco membership ($60 for the lower-cost Gold Star membership, or $120 for the Executive membership), you are helping Costco make reliable recurring revenue. This, in turn, keeps costs low. Since Costco makes so much money from memberships, it can afford to make smaller margins on everything else.
Let’s look closer at what the Costco membership means for Costco’s business — and for your personal finances.
How much does Costco make from membership fees?
According to Costco’s latest annual report (December 2023), last year the company generated $4.6 billion from membership fees alone. That’s a small percentage of Costco’s total sales ($237.7 billion) but a large percentage of Costco’s profit (“net income”) of $6.3 billion. Another way of thinking about it is that Costco’s membership fees were equal to about 73% of Costco’s profits.
Does it feel unfair to pay money for permission to shop at a store? Costco members don’t think so; they tend to be extremely loyal and keep coming back. Costco now has 128 million members and a 90% membership renewal rate. Clearly, millions of members are getting enough value from that annual fee.
Why Costco membership matters for Costco shoppers
According to CNBC, Costco CEO Ron Vachris said the Costco membership is, “The most important item we sell.” He added, “Everything we do supports that transaction.” Essentially, ensuring members keep coming back and renewing their Costco memberships is at the core of the business.
As a Costco member, you get special deals and discounts on a surprisingly wide range of items and services, including:
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Gasoline: Costco gas is often lower-priced than nearby gas stations.
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Food: As well as Costco’s big discounts on bulk grocery items, the famous Costco $1.50 hot dog combo meal is in such high demand that Costco has had to crack down on non-members trying to eat at the food courts.
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Tires: Costco tire prices are often competitive with (or better than) nearby discount tire warehouses.
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TVs and appliances: You can get new appliances and big-screen TVs delivered to your house by Costco staff. The service includes customer-friendly warranties and concierge support.
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Healthcare: Need an eye appointment or a lower cost on prescription drugs? Costco can help. It even offers a special deal for members to use the Sesame telehealth service.
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Treasure hunts: One fun aspect of being a Costco member is wandering the aisles to find surprisingly great deals on items you didn’t even know you needed, like patio dining sets, sectional sofas, seasonal deals, laptops, and tech gadgets.
Check out our guide on maximizing your Costco rewards for more ways to get the most value out of your membership.
Bottom line
Costco earns about 73% of its profits from membership fees. That’s a good sign for Costco shoppers’ bank accounts, because it means the store really is trying to offer the best possible deals at the lowest prices. Since Costco has a membership loyalty rate of 90%, this is a good sign that most Costco members feel like the value of a Costco membership is well worth the cost.
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This One Item Helps Costco Earn Billions of Dollars per Year — It’s Not Rotisserie Chicken was originally published by The Motley Fool
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