- Costco's membership deals are a crucial part of why its prices are so low — but that's not the only reason why Costco is so cheap.
- The retailer's business model depends on its ability to offer dirt-cheap prices on everything from golf balls to toilet paper.
- Costco uses strategies including cutting advertising, limiting stock, and building up its private Kirkland brand to keep prices uber-low.
Costco has gained an army of followers by keeping costs as low as possible.
Hot dogs cost just $1.50 at the in-store café. Rotisserie chickens have cost $4.99 since 2009. Wine costs 20% less than most wine stores, meaning customers save $5 to $12 on every bottle.
Costco has built a business model that depends on offering customers the lowest prices possible. The retailer doesn't need to advertise — news of its fantastic deals spreads simply through word of mouth.
"When I started, Sears, Roebuck was the Costco of the country, but they allowed someone else to come in under them," Costco's co-founder Jim Sinegal told The New York Times in 2005. "We don't want to be one of the casualties. We don't want to turn around and say, 'We got so fancy we've raised our prices,' and all of a sudden a new competitor comes in and beats our prices."
While offering the best deals possible is good business for Costco, keeping prices low is often easier said than done. Costco has a growing number of competitors in the bargain retail space, including Walmart, dollar stores, and discount grocery chains like Aldi and Trader Joe's.
However, Costco is still managing to beat out the competition. In 2017, the company reported $126.2 billion in revenue, a 9% increase from the prior year, when it reported $116.1 billion in revenue.
Here are seven strategies Costco uses to keep prices low and save customers money:
Not advertising
Because Costco keeps costs so low, the company operates with thin profit margins. Costco saves an estimated 2% a year in costs by not advertising, allowing the company to reinvest that money in slashing prices.
"One of the keys to Costco's success, and its profitability, is that the company spends next to nothing on advertising," Tim Green wrote in finance blog The Motley Fool. "Other than sending out direct mail to prospective members, and sending coupons to existing members, Costco does no traditional marketing at all."
Limiting the number of items sold
According to Costco, an average warehouse carries about 4,000 products compared to the 30,000 found in most supermarkets. A supercenter can sell up to 100,000 products.
By only stocking a handful of toothpaste brands, as opposed to the plethora you can find at most stores, suppliers are forced to compete with each other to win a place on Costco's shelves. And, suppliers want to make the cut — because there are only a few options, customers end up buying a lot of the brands that Costco decides to stock.
Costco name-checks its "tremendous buying power" as key to its low prices on the company's website.
"By carefully choosing products based on quality, price, brand, and features, the company can offer the best value to members," the website states.
No-frills design
With concrete floors, tall stacks of merchandise, and a sprawling, often-windowless design, Costco warehouses aren't trying to provide customers with an aesthetically pleasing experience. And, by focusing on efficiency over value, they can save customers money.
Costco doesn't have to redesign stores to keep up with trends. The company doesn't even need to hire workers to unpack boxes — products are purchased in bulk and then placed directly on warehouse shelves, with little attention to aesthetics.
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