How Costco built $86 billion in customer loyalty by charging them to shop
The retail giant's counterintuitive strategy reveals what customers truly value in an era of infinite choice
Walk into any other shop, and they want your money. Walk into Costco, and they want your money before you've even seen what they're selling. This seemingly mad approach has created the most loyal customers in retail history.
The numbers are staggering. Costco charges $65-130 annually just for the right to shop there, yet 92.9% of customers renew their membership year after year. To put that in perspective, Netflix's churn rate would make Costco executives weep with laughter. Most subscription services dream of half that loyalty.
Here's the part that breaks every rule in the retail playbook: Costco makes 73% of its gross profit from these membership fees alone. In fiscal 2024, that meant $4.8 billion from memberships versus $254 billion in total sales. The company essentially prints money before customers buy their first tube of toothpaste.
This isn't just clever accounting. It's a complete reimagining of what retail can be when you stop treating customers as targets and start treating them as partners. (In the UK, membership ranges from £15 for online-only access to £84 including VAT for Executive membership.) The psychology behind this reversal reveals something profound about human behaviour that most businesses completely miss.
The membership fee that rewires your brain
Pay £50 to enter a shop, and something fascinating happens to your mind. You stop thinking like a typical consumer trying to minimise spending. Instead, you start thinking like an investor trying to maximise return.
This psychological flip is worth billions. Once you've paid upfront, every purchase becomes validation of your decision rather than a reluctant expense. You drive past three supermarkets to reach Costco. You buy 48 rolls of toilet paper not because you need them, but because the per-unit cost proves you're brilliant. You become an unpaid sales representative, badgering friends to join because their membership validates your own choice.
Jim Sinegal, Costco's co-founder, understood this when he carved his pricing commandments into corporate stone: no branded item marked up more than 14% above cost, Kirkland products capped at 15%. These aren't pricing policies—they're psychological contracts. Costco deliberately handcuffs its own profit potential to earn something far more valuable: genuine trust.
The membership transforms customers into stakeholders. They're not victims of profit extraction; they're beneficiaries of operational efficiency. When Costco saves money, members save money. When Costco succeeds, members feel smart. This alignment of interests explains why a company can charge people to shop and have them queue up grateful for the privilege.
Why choice is the enemy of satisfaction
Most retailers worship at the altar of infinite selection. Costco practices choice heresy, stocking just 3,700 products compared to Walmart's 140,000. This isn't limitation—it's liberation.
Professor Sheena Iyengar proved this at Columbia University. When shoppers faced 24 jam varieties, paralysis set in. When offered just six, purchases increased tenfold. Too many options create anxiety about choosing wrongly. The brain, faced with endless possibilities, often chooses nothing at all.
Costco weaponises this insight. Instead of 15 breakfast cereals creating decision fatigue, they offer three excellent options plus Kirkland. No analysis paralysis. No buyer's remorse. Just swift, confident purchasing.
But here's the genius: limited selection doesn't weaken Costco's negotiating position—it transforms them into retail kingmakers. With only one or two slots per category, suppliers don't negotiate shelf fees. They compete in gladiatorial combat for access. Brands redesign packaging, tweak formulations, and slash wholesale prices for the privilege of Costco placement.
This scarcity creates a virtuous cycle that traditional retailers can't match. Limited selection drives volume. Volume increases buying power. Buying power enables lower wholesale prices. Lower wholesale prices allow retail prices that make membership feel like financial genius.
How Kirkland became bigger than Procter & Gamble
In 1995, Costco made a decision that violated every retail orthodoxy: they killed off 30+ private label brands and bet everything on one name. Kirkland Signature.
The epiphany came from embarrassment. Co-founder Jim Sinegal discovered a warehouse manager couldn't identify Pinnacle legal notepads as a Costco product. If employees couldn't recognise their own brands, how could customers build loyalty?
Conventional wisdom screamed against consolidation. Successful retailers used multiple brands to target different demographics and hedge reputational risk. Sears had Kenmore, Craftsman, DieHard. Target deploys 45+ private labels. Walmart juggles 20+.
Costco said: one brand, one promise, one standard. The gamble paid off spectacularly.
Kirkland Signature now generates $86 billion annually—more than Procter & Gamble's entire empire. This isn't just America's largest private label; it's one of the world's most successful brands by any measure, accounting for 30% of Costco's revenue.
The secret? Kirkland doesn't compete with national brands—it partners with them. Duracell manufactures Kirkland batteries. Starbucks roasts Kirkland coffee. When Titleist sued over Kirkland golf balls, claiming they were too good to be knock-offs, it became the ultimate brand validation.
This transparency builds compound trust. Satisfaction with Kirkland olive oil creates confidence in Kirkland tyres. One positive experience echoes across 600 product categories, creating cross-selling that traditional private labels never achieve.
The cultural triumph of anti-cool
Costco has achieved something remarkable in our Instagram age: making concrete floors aspirational.
While retailers spend fortunes on atmospheric experiences, Costco's deliberately utilitarian aesthetic has become authentic cultural currency. Generation Z increasingly describes Costco using terms like "premium" and "visionary"—language typically reserved for luxury brands.
For young consumers, shopping at Costco signals consumer intelligence rather than compromise. The bulk-buying model aligns perfectly with collaborative consumption patterns—40% of young shoppers split purchases with roommates via Venmo. It's efficiency as social media strategy.
This anti-aesthetic appeal reflects deeper cultural shifts. Having grown up with sophisticated marketing, young consumers view elaborate store designs as manipulation designed to justify higher prices. Costco's no-frills approach signals transparency and value focus—qualities that resonate with consumers increasingly sceptical of lifestyle marketing.
The irony is delicious: a retailer that spends virtually nothing on traditional marketing has become a content phenomenon. "10 New Costco Deals" videos regularly generate over one million views. Product reviews and shopping hauls create substantial organic engagement. Costco has accidentally mastered the attention economy by ignoring it entirely.
The limits of disruption
Despite its success, Costco faces genuine threats that could undermine its model. The digital shopping revolution poses the most immediate challenge.
Amazon Prime offers similar annual fees with extensive digital benefits. Sam's Club invests heavily in scan-and-go technology. Traditional supermarkets launch sophisticated private labels and bulk options. Young consumers increasingly expect seamless online experiences and rapid delivery.
Costco's cautious e-commerce approach reflects a fundamental tension: much of the magic happens in physical warehouses. Free samples drive impulse purchases. Treasure hunts create discovery. The satisfaction of hefting bulk purchases validates membership investment. How do you digitise that visceral experience?
International expansion presents both opportunity and risk. Success in 14 countries suggests the membership model translates across cultures, but each new market tests core assumptions. Natural growth limits also loom—the model works best in suburban markets with cars and storage space. These ideal locations aren't infinite.
Yet betting against Costco means betting against human psychology. The company has proven that customers will pay for access to genuine value, simplified choice, and transparent pricing. In a world of infinite options and sophisticated manipulation, the most radical approach might simply be honesty about what you offer and what it costs.
The enduring power of aligned incentives
Costco's success illuminates a fundamental truth about sustainable business: when customer and company interests align, extraordinary loyalty follows.
The membership model creates genuine partnership. Customers benefit directly from operational efficiency. The famous $1.50 hot dog—unchanged since 1985 despite decades of inflation—isn't marketing theatre. (In the UK, this costs £1.50.) It's tangible proof that your interests and theirs point in the same direction.
This explains why Costco can maintain pricing discipline that would bankrupt competitors. When you cap markups at 14-15%, you're not optimising quarterly profits—you're building institutional trust. When you charge people to shop and they thank you for it, you've transcended retail to create something rarer: a business model built on substance rather than appearance, partnership rather than exploitation, long-term thinking rather than quarterly optimisation.
The concrete warehouse aesthetic may not photograph well for social media, but it represents something increasingly precious in modern commerce: radical honesty about value. As consumers grow weary of manipulation and artificial scarcity, Costco's approach offers a template for sustainable competitive advantage.
Sometimes the most revolutionary act is simply doing what you promise, charging a fair price, and treating customers like intelligent adults. In a world of infinite choice and finite attention, that might be the most disruptive strategy of all.
This analysis was inspired by Taylor Bell's comprehensive examination of Costco's business model. You can watch her original investigation here.