Deliberately cap your markup on goods so low that cheapness becomes a permanent credible promise, then move your actual profit to a fee customers never resent paying.
Costco
Costco Wholesale is a membership-only warehouse club founded in 1983 by Jim Sinegal and Jeff Brotman that sells a tightly curated range of goods at close to cost and earns almost all of its profit from annual membership fees. The through-line across its stories is a single deliberate inversion: Costco caps what it makes on merchandise so it can move profit somewhere the customer never resents paying it, and that one choice governs both how it packages its offer and how the whole business makes money.
Pricing & Packaging: capping the markup so price becomes the product
The problem. Bulk warehouse retail sells the same undifferentiated goods available everywhere, and competing on price alone in a commodity category is a race toward zero margin. A retailer that profits on each item is structurally pushed to mark that item up, which quietly erodes the very price promise that is supposed to bring shoppers back. Costco needed a way to make "cheapest" a credible, permanent claim rather than a rotating promotion.
The approach. Costco packages the offer by ruling out its own greed: markups are capped at 14% on branded goods and 15% on its Kirkland Signature private label, versus roughly 24% at Walmart and far higher elsewhere. It stocks only about 3,700 to 4,000 SKUs, against 30,000-plus at a typical supermarket, so per-item volume is enormous and it extracts the lowest possible supplier prices, which pass straight back to members. Kirkland Signature, priced below national brands and held to that same 15% cap, anchors quality perception while disciplining branded suppliers.
How it solved it. The curation and markup cap hold Costco's gross margin near 11%, structurally below conventional retail, which makes the low-price claim self-enforcing rather than a marketing pose. The private-label engine works so well that Kirkland Signature now generates roughly $52 billion a year, larger than Nike. As Sinegal put it, "This isn't a tricky business. We just tried to sell high quality merchandise at a lower cost than everybody else."
Business Model: moving all the profit into the membership fee
The problem. If a retailer captures its profit on the goods it sells, its incentives fight its customers: every point of margin it adds makes the shopper worse off, so the value promise and the profit motive are permanently at war. Costco wanted a model where selling things cheaper actually made the company money instead of costing it. That required capturing profit somewhere other than the transaction.
The approach. Costco separated value delivery from profit capture: the merchandise business runs roughly at breakeven, and the profit lives in the flat annual membership fee ($65 Gold Star and $130 Executive in the US after the September 2024 increase from $60 and $120). Because the fee, not the markup, is the profit, every merchandising decision is aligned with the member, since the cheaper Costco sells, the more renewal-worthy the membership becomes.
How it solved it. In fiscal 2024 Costco moved $254.5 billion in goods yet earned only $9.29 billion in operating income, of which $4.83 billion, over half, came from membership fees representing under 2% of sales. That structure produced a US and Canada renewal rate of 92.9% (90.5% worldwide), among the highest recurring-revenue retention figures in any industry, and the September 2024 fee hike flowed almost entirely to profit, demonstrating the pricing power locked inside a 90%-plus renewal base that a competitor without the fee cushion cannot solvently match.