Costco is the world's biggest and most well-known 'warehouse club'. It is the third largest retailer in the world, lying at the top after giants like Amazon and Walmart. Established in 1983, they have more than 785 stores across 12 countries worldwide with more than 493 warehouses. With such a massive scale of operations, Costco is studied by many business schools for its business model, customer acquisition and distribution strategy.
The Costco marketing mix is unique such that it is able to excite its loyal customers with its bulk-selling-based business model. As you read further, you will observe how its business model itself attracts customers and enables word-of-mouth marketing.
In this case study, we will understand the Costco marketing strategy and what entrepreneurs can learn from their marketing and business operation methods.
Costco's Business Model
To understand the Costco marketing strategy, we need to know how its business model works. This is because its promotion strategy revolves around its membership program and managing supply-demand using volume sales.
Costco, along with several other retailers, operates on a business plan known as a warehouse club. It is closely associated with the cash-and-carry model.
Although both models are very similar, there may be a few differences between them. The general approach is:
- A warehouse club sells a variety of wholesale items directly to its members from a warehouse.
- A mixture of individual customers and small business owners comprise the customer base.
- The customer goes to the warehouse to purchase goods at wholesale prices and then transports them back to their homes all by themselves.
Costco's business model is slightly different from standard wholesale retail as the customer has to pay for the goods on the spot and transport them by themselves rather than receiving an invoice when those goods are delivered to them. Thus, its marketing mix involves educating the target audience about its operations and pricing.
How does Costco's business model differ from that of traditional discount retailers in the retail industry?
When compared to other companies, Costco's advantage lies in its own private label, discount prices, membership dues and the price club. Costco's business model has provided customer equity with something they could rely on even at low prices. Costco's business model is also a stable one that investors seek as a good investment.
What does Costco spend on marketing?
Costco is capable of selling its products in bulk at lower prices to retain every customer and their interests. Costco has no advertising revenues as its customers return with membership dues. Costco's membership business model is really efficient as it makes up to 75% of their profit which they do not have to spend elsewhere.
What makes Costco so well-established?
Customers love low prices. More discounts by Costco enable more purchases in volume. Thus, the Costco membership fee is quickly recovered, leading to a more than 90% renewal rate. Today, Costco doesn't indulge much in fancy advertisements as it has established itself as a trustworthy brand in the retail market.
How does Costco create Value for Customers?
Costco's membership program offers no risk and thus a great advantage to its customers. Consumers can even request refunds if they are unsatisfied with its service.
Understanding the Costco Marketing Mix
The Costco marketing mix is majorly focused on efficient management of inventory, private-label branding and high-volume sales. Here's how the Costco marketing strategy is designed across the 4Ps of marketing:
The company enters the market with products, with a focus on popularity and value delivered in the market. Marketing Mix ensures that the products can have excellent reach to the target market.
Use of Membership strategy
Costco Wholesale Corporation uses a membership strategy in Costco Wholesale offers. A member of the Costco Wholesale Corporation has access to a variety of products at a low price. You can either purchase the Basic membership which would cost 60 dollars, or the Executive membership which would cost 120 dollars. Although Costco does not have as much variety as Walmart or Target, it still gives them stiff competition through its huge sales, massive warehouse chain and merchandise.
It offers a narrow range of product lines with a broad category. The company now has nearly 330 items at the private level, accounting for nearly 15% of its total revenue. This just shows how powerful Costco's business model actually is.
Main product offerings
The main products of this business are food, furniture, electronics, music, hardware, jewellery, clothing, health, medicine, wine, etc. It also provides real estate services, home and car insurance, life insurance, travel agency, mortgage services, etc.
They have expanded their product services also online. They also bring seasonal products to their customers which gives them an added buzz. Costco also sells premium quality products and services under its private label Kirkland Signature.
A good company must decide the price of its items based on cost and market value. The pricing strategy tells us how efficient the company is and why people should not negotiate with the rate offered.
Although Costco Wholesale company focuses on providing a valuable experience to the customer and has employed a huge workforce to do so, it managed to offer its products and services at a relatively low price.
Costco doesn't have a single strategy to attract new customers at low prices. The company has a reputation among consumers for other advantages.
Along with products and services, Costco also offers fast food items like hot dogs in their food court (like Ikea). Finding good quality materials at low prices is like a treasure hunt nowadays. But at Costco, it is easy to purchase, and the satisfaction of the customer is of top priority.
Coupons and Discounts
Costco brand provides frequent discounts and coupons to its customers. But still, this company is growing to a greater height with a higher level of profit margin. The secret of this success is that the company has the largest warehouse channel.
It also allows one to buy products in volume and store them for a long time. This strategy has helped this retail industry keep operating at low-cost offering premium goods at low prices.
The pricing system of Costco is based on market conditions across demand and supply. Their pricing strategy is the reason behind their massive success and has made people buy relatively lesser-known products at discounted prices. As a result, when people get the same satisfaction from these less popular products at a lower price, they start buying more of the cheaper ones and the sales automatically increase.
Placement and distribution strategy
The location and distribution of a business play a very important role because it allows physical visibility among people. This strategy lets the target audience know that the business is available with its products at the nearest possible location. The sales increase proportionally as Costco Wholesale markets and advertises its latest store opened to attract people.
How does Costco's wholesale company manage even after having fewer stores and warehouses?
Costco Wholesale has a 12 times annual inventory turnover from selling its products. It means that these vertical marketing strategies are selling its products faster than it is time to pay the bills to the suppliers. Good Brand development practices followed by Costco have helped build good relationships with suppliers and support the availability of products at each store. Also, Costco's online services, a response to the pandemic, have added another staircase of success in its overall brand value.
Costco's marketing strategies aren't very aggressive compared to its competitors. Many companies invest a considerable amount of money in promotional activities across Black Fridays, cultural festivals, having their own discount festivals (like Prime Day at Amazon), etc.
The company's promotion strategy believes that they do not need to spend money on advertising their Costco brand or their free samples or membership fees. With the help of Costco's business strategy, they have established itself in a position where its outlets are enough to be the center of attention among its customers. As a result, this business is always the talk of the town and never misses to please a consumer.
Key takeaways from Costco's marketing mix for entrepreneurs
One of the best features of Costco's marketing mix is how its business model is able to 'wow' its customers with low costs and high-volume products. This experience of buying in the volume itself is able to generate word of mouth and showcases value to people in terms of purchases they do in their stores. Costco's net promoter score is a whopping 79, indicating people are happy with its services and steal-worthy offers delivered.
If you are running a business, especially in retail markets, understanding Costco's marketing mix provides you with key lessons as follows -
Be transparent with your company values
Costco makes sure that their customers see the necessary promotions which might allow them to save their hard-earned money. Their ideas and brand slogans are shown across stores as well as on the internet. They make sure to maintain the identity of a low-cost retail store.
Provide best quality products only
Costco never compromises the quality of their products. They are very strict with their supplier entries and the products which are showcased in their stores.
Build a good network
Costco invests a lot in its distribution network and logistics. They deploy a lot of their resources to find the most efficient routes, ways to keep their goods intact and to ensure timely delivery.
Have a speedy customer service
Any good company cannot become great if its customer service is not up to the mark. Costco invests a lot to make sure they have speedy customer service. They invest heavily in internships and skilled professionals. They make sure to keep the reputation of having the best customer service.
Explore different models for retail business
Costco Wholesale has implemented various revenue models a business can possibly have. They have implemented subscriptions, running clubs, cheap prices ensuring sales in bulk and good product quality and customer service to maintain the faith of its customers. These the are main reasons behind it being one of the most successful companies today.
Learned something new with the Costco marketing strategy case study? Explore the marketing strategy of its competitor, Walmart, to explore how to execute an aggressive marketing mix in a retail business.