How much does it cost to become a member of Costco

Financial library

Numerous reviewers say that the prices at Costco Wholesale Corp. (COST), the member-only discounter, are uncompetitive - and now the retailer has raised its fees for the first time since 2011. The new fees for 2017 are $ 60 per year for a basic card or $ 120 per year for a 2% cash back card.

But Costco uses a subscription business model for three reasons.

loyalty

American food competition is intense. With several major supermarkets, Wal-Mart Stores, Inc .. (WMT) Supercenters, Target Corp. (TGT), Sam's Club, BJ’s Wholesale Club, and a variety of neighborhood groceries and farmers markets have Americans a great variety of where to spend their weekly food budget.

Psychology plays a role in the success of the subscription business model. First, by requiring membership, Costco buyers belong to a private club. In addition, the fee motivates action: the money has been spent; best to take advantage of membership.

This thinking gives Costco its strongest advantage: Customers become loyal to the store. Customers remember having paid a membership fee and are more likely to visit Costco than a non-member is likely to come to Supermarket X. Buyers shop less often in different stores.

Reduction in shrinkage

Costco found a way to prevent theft from its stores: invite people to shop. Shoplifters are unlikely to spend $ 55 a year on the opportunity to steal. In its 2014 financial report, Costco states that the company's theft rate is “well below that of typical discount promotions” and that it is credited to membership fees.

Streams of income

In the volatile world that the grocery business is, Costco has one way to secure a steady source of income: membership fees. In 2016 alone, the company's 86.7 million members worldwide paid $ 2.6 billion in membership fees.

The income from membership fees is high. Aside from a few minutes of working time, plus the cost of the card and the promotional mailings that follow, membership management is not too expensive. As such, Costco’s $ 2.6 billion revenue contribution is almost entirely profit.

When you consider that Costco's operating income was only $ 3.6 billion in 2016, you can see why the company needs membership fees to stay in business. Fortunately, the number of members continues to grow: they increased by 8% in 2014, by 6% in 2015 and by 9% in 2016. The company is expected to grow not only its sales but also its profits in the coming years.

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The final result

Costco has consistently low prices and a high footfall. With the company expanding both domestically and internationally, but also with rising profits and a sophisticated logistics network, the company seems poised to become a retail giant that rivals Wal-Mart. Many Americans believe that Costco only makes membership dues for the money they provide, but direct profit is only one of three reasons.