#5: Costco does not make money by selling products

As noted on the previous post about Costco, the company makes majority of its profit by selling memberships. The membership model enables Costco to sell products on low margins and thus very cheaply.

Costco Gross margins really are significantly lower than the ones for the main competitors. Where Target and Walmart sell products for 25-30% margins, Costco has 12-13% margins.

The case of ever cheaper Calvin Klein jeans

Costco is consistent in keeping the margins low despite gaining sourcing advantages as the volumes grow. Traditionally retailers tend to pass on the savings from better sourcing terms to better profitability. Costco does not operate this way.

There is a famous story related to Calvin Klein jeans for which Costco kept on reducing the price as they managed to negotiate better sourcing prices. Every time Costco managed to secure better sourcing terms, they went on the reduce the already low price of the jeans.

“We pass the savings on to the customer, every time. Do you know how tempting it is to make another $7 on a pair? But once you do it, it’s like taking heroin. You can’t stop.”

— Jim Sinegal, Costco co-founder

Is the membership worth the savings?

There is a lot of debate around whether the Costco membership model is worth the price. Here you can find some articles that review whether the lower prices are worth the Costco membership. You can find some of them here: 1, 2, 3, 4 & 5.