Costco’s Way of Doing Business is all Wrong — but When You Discover the Reasons of Costco’s Success, It’s Breathtaking.
“The key to good decision making is not knowledge. It is understanding. We are swimming in the former. We are desperately lacking in the latter.”
― Malcolm Gladwell, Blink: The Power of Thinking Without Thinking
1. Conventional knowledge: Boring is boring. Costco’s truth serum: Boring is beautiful.
The oft repeated mantra in retail: success in retail is in the small details. First impressions are important. Costco ‘s understanding of its customer base: Great content at cost effective prices is king.
Amazon stands for customer’s convenience. IMAX theaters espouse holistic experience. Costco unspoken mantra — boring is beautiful.
While retailers sweat the small marketing details of look and feel of the store and its layout, Costco does the opposite. The first impressions of a Costco store is a no-frills, plain vanilla warehouse. Content in those shelves is where Costco distinguishes itself. Typical non-profits business model is service at cost without profits. Costco mantra is not to exceed 10% to 15% markup on costs for every quality product. For comparison, it’s nearly 24% at Walmart, 30% at supermarkets, and 35% at Home Depot and Lowe’s.
2. Conventional Wisdom: Variety is the spice of life.
Costco’s understanding of its customer base: Chosen few, quality products is better than multitude of many.
The unspoken assumption in retail world: Cost consciousness is inversely correlated to disposable income. In other words, the more tight your budget, the more cost conscious you are. The reality that Costco has tapped into is more than this: Frugal spending is the heart of the “art of wealth creation.”
The truth: Everybody likes a deal, it releases pleasure hormones. If the deal is on a great product, that doubles up the sweetness. When the chosen few products are already the best among the multitude in the market — one less decision to make at the aisle. Mental convenience is an added bonus.
3. Conventional Wisdom: Make hay while the sun shines. Make money while any customer is inside the store.
Costco’s business model that mints money: Charge people to get into the door. Exclusivity breeds loyalty.
The world is waking up to this subscription model — popularized by Amazon and Netflix. Costco has been at it for years. Costco has perfected the art of milking the sunk cost fallacy — you are invested with the membership, why shop around . Membership starts at 60 dollars a year. Money is made in 90% renewal.
In fact, Costco doesn’t make much money selling stuff, it makes it’s billions in membership! The Math is staggering — “There are more than 53 million paid members as of this year (2019)…. That means Costco is on track to make $4.3 billion from memberships in 2019, which is around 110% of its net income for the year”
Icing on the cake, a third of Costco members pay double the entry level membership fee and get 2% cashback! Talk about cheaper capital for a credit heavy supply business. Useful in a recessionary economy.
Mandatory membership to enter the store creates something more- exclusivity breeds loyalty. But membership is more than loyalty, it is the business model at Costco.
4. Conventional Wisdom: Reduce business costs to maximize bottom-line.
Costco model bets on double the minimum wages!
Costco business model is laser focused on where to find cost savings. Cost savings are in the laser thin margins on products sold. And it is not in the employee’s bottomline. Refreshing and different. And it shows. Costco has had only two CEO’s since 1997. In reference, median tenure of CEO at S&P 500 companies is 5 years.
5. Conventional wisdom: Customer’s cherish convenience. Amazon’s one day shipping is a prime example.
Costco’s sage counterpoint: Customer’s enjoy maze hunt. It releases pleasure hormones.
There is a reason Costco aisles are poorly labeled. As humans, unforeseen discoveries excite the Amygdala (happy part) of the brain. At Costco, serendipity for customers is a deliberate ploy in the warehouse design.
Life’s journey is about assumptions — implicit or explicit. Similarly, business success hinges on a business model tailored around assumptions. Costco deliberate ploy of tossing conventional wisdom has paid rich dividends.
Discovering Costco’s breathtaking counter assumptions is a maze hunt — pleasurable insights hidden in plain sight.
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