Costco Analysis

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AN ANALYSIS AND RECOMMENDATION FOR THE PRACTICE OF
CHARGING MEMBERSHIP FEE’S FOR COSTCO INC.

INTRODUCTION

Supermerchants across the United States are becoming a very popular way for consumers to do their shopping. From furniture, to electronics, to clothing, to grocery, supermerchants offer many different goods all under one roof. A consumer can enter the store and be able to shop for just about anything, and redefines the term ‘one stop shopping.’

Costco falls into the category of a supermerchant. Costco also differs from many of these companies by offering their consumers wholesale prices, but yet still providing the ability to shop for many different items in the same store. Costco provides its consumer with lower prices than a conventional supermerchant by charging its customers an annual membership fee. This fee gives the consumer the right to shop at the warehouse club for items found often in bulk and usually at a lower price. Wal-Mart Inc. also provides this service through their warehouse chain called Sam’s Club. Costco and Sam’s Club are the two major players in the warehouse club industry and although other supermerchants such as Target and Smith’s Marketplace are competition, Sam’s Club is the only major direct completion to Costco. Membershipping is often very popular and has great advantages however, it also has some major drawbacks and this report will provide an evaluation of this business practice.

PURPOSE

The purpose of this report is to show that although membership pricing can be very beneficial to a company, there are also great disadvantages to the practice. This report will show the advantages and disadvantages to the requiring memberships as well as recommendations for future practices of membership pricing.

ANALYSIS

Charging membership fees has given Costco the opportunity to provide members with quality products and attractive prices. Relying on membership fees as a source of revenue allows them to charge a much smaller product markup than other companies and give them a price advantage.

Memberships have also caused some problems for Costco in regards to product pricing, choosing suppliers and even problems with the law in the past. This section will discuss, roughly, what Costco charges its members. There are many different options open to those interested in membership. Costco’s targets consumer will also be evaluated as well as the advantages and disadvantages of membership requirements

MEMBERSHIP PRICES

Costco offers a wide variety of memberships to its customers. Depending on the needs and desires of the customer different pricing, rewards and even shopping hours are available. There is also memberships for business that provide business owners with many reward incentives and further product discount.

The fees collected form members are the primary source of revenue for Costco. By collecting membership fees Costco has the ability to charge very low prices on their products. With only a small markup on goods sold at Costco it generates a low amount of revenue, so Costco’s depends on membership fees to continue business operations.

CONSUMER BASE

The target consumer for Costco is a wealthier base than other retailers. Costco has to bring in members that are willing to pay money up front for just the opportunity to shop, then further pay for the goods as well. This requires a consumer that has enough money to pay the upfront costs of shopping even before entering the store. This often results in many consumers loss as they may pay membership costs, yet, for one reason or another, never enter the Costco warehouse. Not everyone can afford to do this, so Costco targets the wealthy, with promises of savings once they do enter the doors.

By bringing in a wealthier crowd there is more potential that the consumer will spend more once inside the store. This is very important because Costco already has a minimal product markup so...
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