How Costco Merchant Services Work

Costco has a pristine reputation. In addition to being the fourth largest retailer in the world, they regularly top employee and customer satisfaction charts. Much of Costco’s success can be attributed to their no-frills wholesale membership model. Costco customers pay an annual membership fee of $60 for a Gold Star plan and access to low wholesale pricing on bulk goods. This unbeatable value spreads across product and service categories including grocery, home goods, clothing, health and beauty, alcohol, auto tires and servicing, vacation packages, gasoline, and more.

Though Costco offers unbeatable value on all of the above products and services, there is one area where they can improve: credit card processing. Costco currently offers tiered credit card processing that is done through Elavon. Since Costco does not actually process the payments themselves, the rates have a built-in markup and don’t currently provide the same value for customers that the rest of their store offers.  

No one retailer is perfect. But, Costco gets a lot of things right. This rapidly growing warehouse and grocery retailer’s motto is to “do the right thing.” For Costco, doing the right thing extends beyond offering low prices. Here are a few lessons every retailer can learn from Costco:

How to Retain Employees

Costco has an astonishingly high employee retention rate of 94%. Retailers typically struggle to retain employees long term, especially hourly workers. But, Costco has kept employees happy and loyal over the years by consistently offering above-average retail wages and full medical and dental benefits, even to part-time employees. Many retailers avoid offering full benefits because they come at a considerable expense. But, the price of employee turnover is even higher.

It costs retailers between 3350% of an entry-level employee’s annual salary to replace them when they leave. For mid-level and executive positions, the cost is even higher. With today’s record-low unemployment rates, hanging on to your current employees is more critical now than ever as fewer people are actively seeking employment. Costco teaches us that investing in your employees can cut overall costs by retaining workers year after year.

Stellar Customer Service

High employee retention rates lead to higher productivity and better customer service. Companies that have lower employee turnover rates tend to have the highest levels of customer satisfaction. Costco routinely has one of the highest Net Promoter Scores for retailers and recently topped Newsweek’s Best Customer Service 2019 survey for superstores and warehouse clubs. Retailers can achieve stellar customer service ratings like Costco by doing these three things:

Promote from within. 76% of Costco managers start out as hourly employees, meaning they know how to empower front-line workers and how to approach common customer service complaints.

Have strong values. Costco’s “do the right thing” motto is more than words on paper. Costco scans every customer’s receipt before they leave to make sure they were not overcharged. When Costco found out a shirt they advertised as 100% silk, in fact, wasn’t, they contacted every customer who purchased that product and offered a refund.

Be transparent. Despite being one of the largest retailers in the world, if you call Costco’s corporate customer service, it’s easy to speak to a human associate. When you speak with Costco’s customer service, whether in-person or in-store, they are trained to provide straightforward answers, not scripted apologies.

That Brick and Mortar Retail is Far from Dead

In 2018, Costco sales grew by nine percent in the U.S., in-store traffic increased by five percent, and they maintained a 90.5% membership renewal rate even with a price increase. Similar superstores, Walmart and Target, only grew by about two percent and five percent, respectively. Costco’s sales growth proves that shoppers are still flocking to stores, as long as those stores provide great products at even better pricing.

The Power of Private Label

Costco’s private label brand, Kirkland Signature, is the secret weapon behind much of Costco’s recent sales growth. In 2018, the Kirkland brand alone raked in nearly $40 billion and makes up almost one-third of all Costco sales. If done right, creating a private label can boost your margins, build your brand reputation, and drive shoppers to your store. But, it takes a lot of careful planning and strategy to create a successful private label.

Customers are wary of brands they are not familiar with. When presented with the option of a slightly more expensive product they know or a more affordable choice from an unknown brand, many consumers will opt for the more expensive option. Developing a store brand that consumers know and trust takes time and skill. To build your own successful private label brand, consider these two pages out of Costco’s Kirkland playbook:
Partner with other known brands. Costco helps build consumers’ trust in their Kirkland brand by partnering with known brands to create their store-branded products. For example, Costco works with Starbucks to create Kirkland Signature roasted coffee beans.

Offer samples. It’s nearly impossible to make it through a Costco store on the weekend without stopping to try a few food samples. Samples are part of the Costco shopping experience. They also help introduce customers to the Kirkland brand and products.  

Invite Your Customers to Sit Down and Stay a While

For many shoppers, going to Costco isn’t a typical grocery run. It’s a full-on family event and weekend activity. Why? Costco’s food court. The food court offers a legendary $1.50 quarter pound hot dog/fountain soda combo, a giant slice of pizza for under $4, yogurt parfaits, chicken bakes, and more. Costco’s food court prices haven’t changed in years. Costco sells 1 million hot dogs annually, four times more than what’s sold during one season of Major League baseball games. Their hot dog is so popular, it even has its own fansite.  

Meaghan Brophy 8 Things Retailers Can Learn From Costco Hotdog 1

The takeaway? Shoppers visit Costco not just for the groceries, but for the experience. For retailers, making your store a destination is not only trendy: it’s profitable. The longer people are in your store, the more they spend. Encourage shoppers to spend more time (and money!) in your store by doing these three things:

Offer samples. Again, with the samples! But, they work. Makeup and beauty retailers, grocery stores, and liquor stores all use sample tastings and services to encourage shoppers to test products.

Have a seated area. A food court certainly isn’t glamorous, but it fits in perfectly with Costco’s no-frills model. Any retailer can create a comfortable seating area around dressing rooms, in-house cafes, or beauty counters.

Sell products for on-premise consumption. Sounds obvious, but having products for customers to use or consume at your store builds engagement, encourages shoppers to spend more time inside, and can help turn your store into a destination. Plenty of customers visit Costco just for the food court.

Careful Product Selection

Meaghan Brophy 8 Things Retailers Can Learn From Costco Store 2

A curated warehouse store sounds like an oxymoron, doesn’t it? The truth is, despite Costco’s 145,00 square foot stores, they only carry 3,800 products. The average grocery store has over 30,000 products, and the average supercenter sells over 100,000. That means each and every item is carefully planned and tested. If an item doesn’t perform, Costco wastes no time cutting that item from the shelves. Having a curated product selection offers many benefits for retailers, including:

Employees know the products. Having fewer products means that employees are more familiar with each option and can better answer customer questions, concerns, and make informed recommendations.

Eliminates decision paralysis. People tend to resist making decisions when there are too many options. When presented with a limited selection, shoppers are more likely to make a purchase and to be satisfied with their choice.

Everyone Loves a Bargain

As a retailer (and a consumer), there’s a lot to learn from Costco. This includes not overpaying for any product or service. At the end of the day, Costco’s biggest draw is the rock-bottom pricing on everything from toilet paper to car tires without sacrificing on quality. For consumers, Costco offers some of the best pricing on bulk goods.

Many small businesses even purchase office supplies and restaurant ingredients from this warehouse wholesaler.

Costco’s Shortcomings

As you may have noticed, we love Costco’s direct-to-consumer business model and think that merchants can learn a lot from the company.

But, one area where Costco’s pricing falls short for small businesses is their credit card processing and merchant services. As we discussed previously, Costco’s merchant services do not offer wholesale pricing.

And unlike their retail business, their credit card processing offerings do not use a membership model.

The bottom line? While there are plenty of great lessons to learn from Costco’s retail side, be wary about emulating or signing up for their merchant services. When it comes to credit card processing, check out Payment Depot. With Payment Depot, you won’t encounter hidden fees thanks to our transparent, interchange plus pricing model, ensuring you always know what you’re being charged.

Quick FAQs about Costco

Q: What is the membership model that contributes to Costco’s success?

Costco’s success is largely attributed to its no-frills wholesale membership model. Customers pay an annual membership fee of $60 for a Gold Star plan, giving them access to low wholesale pricing on bulk goods across various product and service categories, including groceries, home goods, and more.

Q: How does Costco maintain such a high employee retention rate?

Costco boasts an employee retention rate of 94%, achieved by offering above-average retail wages and full medical and dental benefits even to part-time employees. This investment in employees reduces turnover costs and increases overall productivity and customer satisfaction.

Q: What lessons can retailers learn from Costco’s employee management strategies?

Retailers can learn from Costco’s strategies to promote from within, adhere to strong company values, and maintain transparency. These practices help create a motivated workforce that delivers exceptional customer service, leading to high customer satisfaction.

Q: How does Costco’s customer satisfaction compare to other retailers?

Costco consistently ranks high in customer satisfaction surveys, often topping lists for best customer service in superstores and warehouse clubs. Their practices, such as scanning receipts to ensure correct charges and offering refunds proactively, contribute to their high Net Promoter Scores.

Q: What is the role of Costco’s private label brand, Kirkland Signature, in its sales growth?

Kirkland Signature, Costco’s private label brand, plays a significant role in its sales growth, accounting for nearly one-third of all sales. The brand is perceived as high-quality and affordable, driving consumer trust and loyalty.

Q: How does Costco’s product sampling strategy benefit the company?

Costco’s product sampling strategy is integral to its shopping experience. By offering samples, Costco introduces customers to new products, driving engagement and encouraging purchases. This strategy is particularly effective for promoting their private label products.

Q: What are the benefits of Costco’s curated product selection for retailers?

A curated product selection means employees are more knowledgeable about the products, which improves customer service. It also helps reduce decision paralysis for shoppers, making them more likely to make a purchase and be satisfied with their choice.

Q: Why should retailers be cautious about Costco’s credit card processing services?

Costco’s credit card processing services, managed through Elavon, come with built-in markups due to the third-party handling of transactions. This results in higher rates that may not provide the same value as Costco’s retail offerings, making it less ideal for small businesses looking for wholesale pricing.

Q: How can retailers create a shopping experience similar to Costco’s?

Retailers can create a destination shopping experience by offering product samples, having a comfortable seating area, and selling products for on-premise consumption. These strategies encourage shoppers to spend more time and money in-store.

Q: What is the impact of high employee retention on Costco’s customer service?

High employee retention at Costco leads to a more experienced and knowledgeable staff, which in turn results in better customer service. Employees who stay longer are more familiar with company practices and better equipped to handle customer inquiries and issues effectively.