Rashida
Have you ever seen or heard a Costco commercial?
I haven’t.
Yet, in 2019, they had 98.5 million members and a brand value of $21 billion.
While sales dipped for the first time in April due to the pandemic, Costco rebounded in May, June, and July and is still going strong, unlike many other retailers.
How is the grocery giant so successful with their unconventional model?
Build Customer Loyalty
Most of us have never seen any Costco advertising or marketing material because that’s not where they spend their money. Costco relies on targeted direct mail to attract new customers, and several strategies to encourage repeat customers.
First, it’s important to understand that Costco doesn’t make most of its money from selling the products on its shelf. Their business model is essentially dependent on charging a fee (in the form of memberships) to allow you to shop in their store. The base membership is $60 a year and gives you access to Costco stores. Their goal is to make happy customers that renew their memberships year after year. Considering that Costco has a 90% membership renewal rate, they’re doing a pretty good job.
Here’s what Costco does to create loyal customers:
Create a Unique Experience
We’ve talked about it before with IKEA, but stores that offer a unique experience tend to do well. Shopping in a Costco is very distinct. They have very little in-store signage, and instead, create an experience more akin to a treasure hunt. This means that customers peruse up and down the aisles looking for new products.
Pre-COVID the in-store experience included demos and samples, more lures to keep you there longer and expose you to new products. They also have a large food court with low-fare items so you can’t use hunger as an excuse to dip out early.
Drive Impulse Buys
Costco keeps a relatively small number of SKUs (around 4,000 compared to WalMart’s 150,000). They have products rotate in and out of inventory, which drives impulse buys. When customers see something unexpected and know it may not be there the next time, they’re more likely to jump on the unplanned purchase. Ultimately, this leads to customers buying more than they planned to, and looking forward to seeing what’s new there each trip.
Happy Employee, Happy Customer
Costco is known for treating its workers very well. Compared to similar retail jobs, Costco workers make more money and enjoy better benefits. Glassdoor estimates the average cashier salary at Costco is $14 an hour, while the national average is $11. Hourly and salaried, part-time, and full-time employees are eligible for benefits at Costco as well. Treating employees better will increase employee satisfaction, and more satisfied employees are more likely to treat members better as well.
Data Analytics
Instead of investing in traditional marketing strategies, Costco pours its time and effort into analyzing its customers. They collect and analyze customer data from each Costco card swipe. They leverage the data to pinpoint items that their members would appreciate, but that may not be obvious. They can also use their massive number of members to get better deals when negotiating, which allows them to deliver great value.
Low Margins
One of the major things that keep customers happy is low prices and good value. Costco keeps the margins on their products much lower than other retailers. Again, this is because Costco is not making its profits from its margins, but from its membership fees.
Ancillary Businesses
Part of upping customer loyalty and getting people to buy higher-ticket memberships is offering ancillary services. Costco has expanded far beyond groceries and essentials. They also get customers coming back for the cheap gas, travel service, car-buying service, optical services, and more.
Word-of-Mouth
By creating an ideal customer experience and driving loyalty, Costco has gained the power of one of the most effective marketing strategies: word-of-mouth. I’ve never seen a Costco commercial or ad, but I’ve heard about the store time and time again from their loyal customers. Either my friends are uniquely obsessed, or Costco is doing something right when it comes to the consumer experience.
