Shopping has changed a lot in the past decade. It can be anything from groceries to clothes to appliances things are not like they were before. The technological advancements have made shopping very sophisticated and fastidious. You don’t even have to go out if you want to get something. All you have to do is open your smartphone, press a few buttons and watch things get delivered to you. The one thing that everyone has noticed is how you get things for cheap when you get them at certain places. Gone are the days when you could only get groceries in a supermarket. Today you have supermarkets that sell almost everything that you need for your home. This is great because people don’t have to go to ten different places to get ten different things. You can get all of them at one place.
Ever since places like this have emerged people have welcomed them with open arms. People rush to these places if there is one near to them. Because they like shopping at these kinds of places. Not only they can get the things they want but they can also find them in bigger packages compared to the normal stores. The best part about shopping at these places is the discount you get on all the things you buy. It doesn’t matter what your social status is, if people know that they can get something for cheap they would definitely go to that place where they can get it. Everyone wants to save a few bucks whenever they buy something and these places understand this. The best examples for this are places like Walmart and Costco. The current article is about the business model of Costco. So, let’s dive into the topic.
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What is Costco?
If you are someone who is living in the United States then there is no need to tell you what Costco is. For those who don’t know what Costco is, it is a wholesale corporation that is very huge in America. It is the largest retailer in the world after Walmart. Buy unlike Walmart you cannot just walk into a Costco and buy anything you want. It is a bit different. Costco is a chain of clubs that is only for the people who are members of it. So if you want to buy something from Costco you have to be a member of it. It all started way back in 1983 when the Costco has opened its first warehouse in Seattle by Jeffery H. Brotman and James Sinegal. This was after they saw the idea of Sol Price and his son opened the first Price Club Warehouse in 1976.
1993 was an important year for Costco as they merged with Price Club. This was a big deal as it happened after the Price Club declined the offer of Walmart to merge with them. But merging with Costco was very easy for the Price Club as the scale and business models of both companies were similar. So they didn’t have any problems during the merger and it was seamless. After the merger the company was named PriceCostco. After this the membership of the companies have become the same. So if you had Costco membership you could just shop at Price Club and vice versa. But the Price brothers left the company in 1994 to form another Warehouse Club in central America called PriceSmart. In 1997 the name was Changed to Costco. Today Costco is a multi-national retail corporation and is present also in countries like Canada, UK, Japan and France.
How does it work?
As mentioned earlier, Costco is a warehouse for members only. So it functions a bit differently from other similar businesses. There are two ways in which you can get a membership at Costco. The first way to get a membership is to walk into your nearest Costco store and find the counter where you can get the membership. If not you can just get your membership online as you can also get a digital membership card now. But this membership is not for free. You have to pay a certain amount of money to get your membership card.
You can do it through the application of Costco. To do this you have to first download the Costco application from the Google Play Store or App Store. After you install the application you will find a Membership icon at the bottom when you open it. If you click on it you will go to the login page. Create your own Costco account. After you do this you have to answer a series of questions. All of these questions are posed to know who you are. Once this happens they will ask you to verify your membership. If the verification is successful you will find a digital membership card on your screen. You have to open this application whenever you visit a Costco store. After the shopping is done you can checkout at the counter.
Business model of Costco
As you already know this is a retail corporation and the business models of companies like this are similar. Most of them follow the same strategies to reach out to potential customers. So the Costco business model will have some similarities with the business model of Walmart. Let’s take a look at the strategies they follow to bring in profits.
Reaching the target audience
It is a members only warehouse so you cannot expect the store to reach out to people belonging to all economic conditions. So this warehouse Club is for people who belong to the middle class and above. Because these are the people who will buy a membership in these stores if they know that they can save on the things they buy. If they know that they will be able to get all kinds of products at Costco if they get a membership then they will definitely get one.
If you look at places like Costco most of the people shopping there are from the middle class. So they have to hold on to these people and they do this by giving the people exactly what they want. They have all the products that people need in their life. You can find everything at Costco from food to appliances. So it is a win win situation for both.
Partnering with manufacturers
When you have a retail chain as big as Costco you have to partner with the manufacturer’s if you want to get all the products you want. This is especially important if they want to sell the items at low price. You cannot possibly make profit if you sell products without having a direct deal with the manufacturers. Costco partners with them to make sure that they get the amount of supply they need. In turn the manufacturers will have a partner who will be buying goods from them at a large scale. But in order to sell the products for less price Costco asks the manufactures to sell them for less price. Not only that but they will also be asked to make packages that are bigger in sizes so that people don’t have to buy a multiple packages of a single product.
Making sure that employees are happy
If you look at these warehouses then you know how big they are. They a need a lot of staff to manage a single store. Each and every one of the employees are important if they want to run the store smoothly. So they have to make sure that the employees are happy doing their job. Only then they will be able to help the customers and the company to improve the business. They don’t want to keep losing employees frequently because it may effect their business and reputation. Apart from salary Costco offers the employees life insurance, health insurance vision insurance, paid leaves and etc.
Increase their members
If Costco wants to increase their profit then they have to make sure there membership base keeps growing. To do this they have tk open more stores in the places where they are not yet present. They have to do this especially in the places where there is no competition. This will allow them to capture the market in that area. They have to provide great offers so that people know about them through the word of mouth as it is the best type of marketing.
How does Costco make money?
Looking at the business model it is not really hard to understand how Costco earns money. So let’s look at the two ways in which it earns money.
Selling products at lower prices
This is what Costco is known for. They sell groceries and other stuff for lower prices than other stores. By doing this they will be getting less profit margin on each product. But they do it on a large scale so they will be making profit by selling products in large quantities.
Membership fee
This is the second way in which the Costco makes money. Each person who want to be a member has to pay a membership fee. There are three membership offered by Costco. Gold Star membership is for $60 and you get two membership cards. Gold Star Executive for $120 through which you will get two cards and 2% discount on all purchases that are over $120. The business membership is for $100 but it allows you can add an additional member for every $60 you pay.
Conclusion
This is the business model of Costco. Current it is one of the largest chain of retail corporation in the world. You can check out other interesting business models on Postling. If you want you can check out the business model of Dunzo here.
