Drilling down further into Costco’s formula for success

Behind all the bravado about Costco customer service is a simple approach that taps into common sense and brilliantly reads the minds of its customers.

At a time when many companies woo prospects with discounts and special offers, then try to ignore them once they become customers, Costco takes a decidedly different path. Once they get you, they work extremely hard to keep you. An August CNN report notes,

“Costco’s 93 million members are exceedingly loyal: As of June, Costco reported 90% of its members renew their subscriptions.”

The report continues,

“Retailers around the world are radically reshaping their strategies to contend with Amazon. Costco has a different tactic: Perfect what’s been working for four decades…Costco (COST) has created a bulwark against Amazon (AMZN) by keeping a lid on costs and using membership fees to offer better prices than competitors.”

Among ways that Costco makes and keeps customers happy:

  1. Fewer items. Notes the CNN report,

“Although big-box retailers like Walmart often sell more than 100,000 items at one of their superstore[s], Costco stocks an average of 3,800 national brands and Kirkland Signature private label products…‘Costco’s product mix continues to resonate with a broad buying base [and] is a distinct competitive advantage,’ Moody’s lead retail analyst Charlie O’Shea wrote in a May report.”

Personal takeaway: I enjoy the fewer-item focus. It’s easier for decision-making, and I generally trust that the items appearing on Costco shelves will be high quality. (And if it says “Kirkland,” I typically feel confident—although you always need to check the label/packaging info, especially on food.)  With lower inventory, suppliers have to work harder to meet Costco’s standards. I already know when to shop somewhere else for items that Costco clearly doesn’t address (e.g., kitchen gadgets that such retailers as Walmart and TJ Maxx/HomeGoods stock in bulk).

  1. Excellent supplier partnerships. Notes CNN,

“Costco has strong partnerships with suppliers and can negotiate with them for the best deals, even when inflation rises, because brands trust Costco will use the cost savings to keep price tags in stores down. Vendors are happy to oblige because it boosts their sales.”

Personal takeaway: As tariffs and other disruptive occurrences impact consumer costs, Costco is more likely to hold their prices given their strong supplier relationships.

  1. The “Norm at Cheers” effect. Costco’s high wages help employee retention and their cost model. Notes a report on Investopedia.com,

“…Costco’s high employee wages are part of its cost-savings plan. With employees earning a decent wage, they are more productive and less likely to quit…Employee turnover is a huge cost of business. Between being short-staffed and the associated costs of finding and training new employees, it can cost a company between 40-150% of an employee’s annual salary to replace him. By removing some of the incentives a person would have to quit their job, Costco is able to reduce employee turnover and save money.”

Personal takeaway: Seeing the same helpful, cheerful people over the years further enhances trust, comfort and a feeling that you will be treated respectfully and competently. This helps make Costco an inviting environment, even when it’s overrun with aisle-hogging shopping carts attached to oblivious shoppers.

The Investopedia article sums it up well:

“Investors and analysts looking to Costco look at a company that doesn’t make a lot of profit but sells products like wildfire. How many retailers make the majority of their profit by selling the right to shop? How many retailers cap their margins to a bit over 10%, in addition to consistent loss leaders that drive customers into the store?…Costco has found it in its best interest to do all of this and, with the stock price and the number of stores worldwide continuing to increase, it’s clear that investors and consumers love Costco and its unique business model.”

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This the second of a four-part series on companies exemplifying superior customer service and employee treatment—and the rewards accruing their bottom lines and shareholders in the process. It’s a win-win model that exposes the zero-sum gain model of “I win, you lose” as an absurd and ineffective way of doing business. You listening, Donald Trump?

ICYMI: PART 1: Costco prioritizes customers, employees over shareholders

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Mark Lusky is a veteran writer, storyteller and author, with 40+ years of public relations, advertising, marketing and journalism experience. Author of A Wandering Wondering Jew… and co-author of Don’t Get Mad, Get Leverage,  Mark (aka The Happy Curmudgeon) is the owner of a Denver-based marketing communications firm celebrating 36 years in business in 2018.

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