7 Marketing Lessons You Can Learn from Costco — and How You Can Use Them to Drive Loyalty and Sales
It’s no surprise that Costco’s direct-to-consumer business model is successful. With its paid membership, the brand generates revenue BEFORE even generating a sale.
But their success lies in more than just a healthy cash flow. Costco has built an extremely loyal customer base and a reputation to boot.
So, how has Costco been able to do this? Just like the retailer has a non-traditional business model, they’ve used some out-of-the-box tactics to market and promote their brand. Here are seven ways Costco is a great marketer.
Lean, data-driven promotions
Did you know that Costco doesn’t have a large marketing and advertising budget? In fact, they rely on targeted direct mail to lure in new customers, and personalized coupons to encourage repeat purchases with existing shoppers.
But that’s not to say that Costco isn’t savvy when it comes to self-promotion. In fact, they’ve had a handle on data-driven retail for a while now, largely thanks to their membership model which has allowed the brand to create customer profiles.
“They study what you buy and when you buy it; as a result, they’re able to offer you — and people just like you — better products and services,” says Spencer X Smith, founder of AmpliPhi. They use this customer data to provide more informed and relevant cross-sells and upsells.
You can do this with your own customers, even without a robust membership model. Using your point-of-sale (POS), you can build customer profiles at the point-of-purchase. Over time, ask for more information about them. What’s their zip code? How did they hear about your brand? You can also use surveys to get more feedback from your customers which can then inform your own marketing strategies.
Guarantees that encourage sales
Maybe this is less marketing-centric and more focused on conversion optimization, but Costco has guarantees that minimize hesitation from buyers.
For starters, an easy return policy for your Costco membership seduces risk associated with the purchase. “We will cancel and refund your membership fee in full at any time if you are dissatisfied,” their website states.
And for shoppers who are happy with the membership but are second-guessing a specific purchase at the store, Costco also uses its magic. With a few exceptions, Costco stands behind every item they sell and has a 100% satisfaction guarantee.
Deal hunters also benefit from Costco’s guarantees. If a customer purchases a product and it goes on sale within 30 days, Costco will refund the difference. Hard to say no to the purchase with those terms.
A unique in-store experience
When you enter a Costco store, it’s unlike most other grocery or department store experiences. One thing that may immediately jump out is the absence of in-store signage. “Costco has crafted an experience where they invite consumers to discover and have a bit of fun while loading up on the basics,” says Jessica Tsukimura, senior director of client services, NYC lead at Stag&Hare. “Consumers cruise the aisles, look for new deals, and try new products.”
Browsing the aisles of Costco is more reminiscent of a treasure hunt than a milk-and-bread run. Shoppers are frequently treated to in-store demos and free samples during their visit, adding to the “discovery” of the shopping experience.
“Retailers can take learnings from the aspects of brand experience and discovery,” says Tsukimura. “Incentivize consumers to come in and EXPLORE your store.”
You don’t need to overhaul your space to do this. Tsukimura recommends “Easter eggs” — such as rotating product displays or Instagrammable features throughout.
Commitment to CSR
It’s no secret that brands with strong commitments to corporate social responsibility (CSR) win in the eyes of consumers. The 2017 Aflac CSR Survey found that more than half of consumers want to support companies that pay men and women equally, and almost three-quarters believe that responsible companies should provide detailed reports of what they pay their employees, broken down by sex and race.
Costco doesn’t provide those detailed reports, but they have taken public stances on pay. “Costco finds many subtle ways to express its commitment to social justice, starting with former CEO Jim Sinegal’s choice to take only $350k in salary and pay workers almost twice the minimum wage at the time,” says Shel Horowitz of Going Beyond Sustainability.
Costco has also stood behind other causes, including the environment. A smart move, considering 70% of respondents to a survey from BSR feel that climate change is a high priority. They have a page on their website dedicated to showcasing their commitment to sustainability.
In 2017, the major retailer also pledged $25 million to Children’s National to improve children’s health. This continued commitment to social good has established Costco as a brand that has CSR at its core, not just as a PR move.
Your staff is the face of your business, and that’s a concept that Costco is very well aware of. They put a strong emphasis on the people who represent their brand, and they make sure they’re well-qualified AND appreciated.
Costco employees must go through a process which is more rigorous than your typical hourly retail application. But the retailer makes the payoff worth it, paying their staff some of the highest wages in their industry. According to Investopedia, most start at an $11.50 hourly wage, but the average employee makes $20/hour.
And that’s not all — employees also enjoy access to employer-sponsored healthcare.
This attention on staff has benefited Costco’s bottom line. Their motivated team is more productive than average retail associates. And it helps to encourage sales. “When you walk into Costco, you’re greeted in a friendly way, and the staff is always helpful,” says marketing consultant Adam Lofquist. “They provide clean aisles and a warm atmosphere that makes customers want to come back.”
Customers come to expect a consistent, positive experience, which creates meaningful and lasting relationships.
Service and retail
Sometimes, it’s not enough to be ONLY a retailer or ONLY a service a provider. Many innovative entrepreneurs and brands are combining the two. And while many consider this a trend in retail, Costco has been doing this for years.
The retail side of Costco is fairly straightforward: Customers come to the store and purchase the goods that are for sale. But Costco is more than just a wholesale discount store. It’s also the fourteenth-biggest pizza chain in the U.S., and they have other service-focused facets to the business, including car and tire, printer ink refills, pharmacies, eye doctors, and more.
Costco has become the ultimate one-stop shop for customers with all sorts of needs — from groceries and tire rotations to eye exams and pizza.
Remember the hype around the Tickle Me Elmo toy around Christmas? There were a limited number of Elmos available, so parents nationwide went crazy to get their hands on one.
This concept of exclusivity as a marketing tactic can take an average offering and turn it into a highly coveted one. Because Costco members have to pay, they’re part of an exclusive club.
Beyond the exclusivity of being a Costco member, there’s also the exclusivity in the access to wholesale prices. Only Costco members can shop there and enjoy those perks. This has created a community around the brand.
Unfortunately, the benefits of exclusivity at Costco don’t extend to the merchant services side of their business. For sellers who want to use Costco’s payment processing services, there is no flat membership fee that grants access to discounted rates. Instead, Costco uses a pricing model that is actually MORE costly for merchants.
At Payment Depot, on the other hand, we take an approach that’s similar to Costco’s D2C offering. Merchants pay a flat monthly fee to access wholesale interchange rates for credit card processing.
FAQs about Costco’s Business Model
Q: What is Costco’s business model?
Costco follows a direct-to-consumer business model, relying on paid memberships to generate revenue before sales even occur. Using an in-depth understanding of customer profiles, they run lean, data-driven promotions and offer exclusive access to their products and discounts.
Q: How has Costco built a loyal customer base?
Costco has crafted an in-store experience akin to a treasure hunt, frequently offering demos and free samples to its members. Additionally, the company encourages sales through an easy return policy for memberships and a 100% satisfaction guarantee on most items sold.
Q: How does Costco utilize customer data in its marketing strategy?
Costco collects customer data through its membership model to understand what products customers buy and when they buy them. They use this data for target-oriented promotions and to suggest relevant cross-sells and upsells.
Q: What is Costco’s approach to CSR?
Costco places a strong emphasis on corporate social responsibility (CSR). The company has made public commitments to social justice, including offering wages significantly above the minimum wage. Costco also supports other causes like environmental sustainability, having dedicated a page on its website to highlight these commitments.
Q: How does Costco ensure the productivity of their employees?
Costco puts a strong emphasis on its employees, who undergo a rigorous application process. The retailer pays competitive industry wages and offers employer-sponsored healthcare to its staff. This investment in its employees aids in providing a consistently pleasant shopping experience for customers and motivates employee productivity.
Q: How does Costco combine retail and service provision?
Besides being a wholesale discount store where goods are sold, Costco is also known for its service provisions. These include services like pizza delivery (being the fourteenth-largest pizza chain in the U.S.), car and tire services, printer ink refills, and more.
Q: Why is Costco’s marketing approach considered unique?
Costco uses a combination of exclusivity and unique offerings to market its brand. Costco memberships provide customers with exclusive access to wholesale prices, creating a community around the brand. Moreover, the company’s unique in-store experiences and commitment to CSR serve to differentiate it from other retailers.
Q: Does the exclusivity of Costco extend to the merchant services side of their business?
For sellers wanting to use Costco’s payment processing services, there is no flat membership fee granting access to discounted rates. In fact, their pricing model can be more costly for merchants.
Q: What can other businesses learn from Costco’s marketing strategies?
Businesses can adopt Costco’s approach to data-driven promotions, creating a unique in-store experience, valuing employee engagement, and prioritizing corporate social responsibility. Additionally, adopting a model of exclusivity (if possible), and leveraging retail and service provisions can help businesses establish a loyal customer base.
Q: How does Costco promote its brand?
While Costco does not have a massive advertising budget, the company is clever with its self-promotion. Utilizing its membership model, Costco relies on targeted direct mail to attract new customers and personalized coupons to encourage repeat purchases.