Costco has certainly studied how to run a profitable business. According to the following article, the “Costco effect” leads members to buy more than they had expected.Here are eight ways that Costco achieves this effect.
https://www.indigo9digital.com/blog/costcosalesstrategy
1. Free samples.
Certainly free samples are a trademark of Costco ((What kind of “sampler” are you?) Samples return to Costco! ) (A day in the life of a “Sample Giver”)). People frequently joke about going there just for a buffet of samples. In addition to seeming like a “nice treat” for customers, samples promote purchases for multiple reasons.
After sampling an item that they enjoy, customers are more likely to buy the product than had they not tasted it. Although the reverse is probably true as well and there are likely times that sample actually makes someone decide NOT to buy the item, I think people are less likely to take a chance on an unknown (or one they are unlikely to enjoy) food at Costco given how much they would have to buy at a time.
Samples also fit with the sales principle of reciprocity. The article mentions Robert Cialdini’s work on persuasion. According to this principle, people like to repay others. Therefore, once given a sample, customers are more likely to then buy the item. I remember studying Cialdini’s work in college and finding it powerful (and persuasive!…oh, groan…). However, I do wonder whether a small piece of cookie would be enough to get people to buy a 50 pack just to feel that they were repaying Costco.
2. Store design.
Costco designs its stores to encourage spending more. According to the article, more essential shopping items like salad and milk are located at the back of the store. This design requires customers to walk through the store before reaching these items. Are there people who run straight to the back of the store? I’m sure there are (even my “let’s look around Costco even though we were just here three days ago” family has even fallen into that group when passing by a Costco and just wanting to buy milk or bananas). However, I would imagine that, more often, customers wander around, stopping to browse the clothes, the pots and pans, the batteries, etc. When not in a rush (and I rarely go when in a rush because I know my style), I have my general routine. I go through the aisles on one side of the store looking for those lovely “97s” (Price endings are not random.) If I find them, I am likely to spend more than anticipated by purchasing items I had no intention of buying when I entered the store. It is true that the design also places the expensive items in front of the store so that people really have to see them. Impulse buys of these items (do people actually buy computers as impulse buys???) will definitely be more profitable than my towel for 6.97 but even so… next, I look at the clothing, then the food in the back, and then the food aisles on the other side of the store.
The article also mentions that Costco purposely moves items around. Therefore, customers wander around even more looking for their target items, thus making it more likely that they will find other things to buy along the way.
3. Loss leaders.
Costco sells some items (e.g., rotisserie chickens)at a loss (An assortment of Costco facts (Part 1 of 2)). Losses are certainly not ideal. However, if some items encourage people to become members and shop for profitable items, Costco benefits.
4. A “treasure hunt” shopping experience.
As mentioned above, Costco moves the regular items around the store so that customers pass other items as they look for the items they came to buy. Costco also carries new and different items for limited times. This strategy makes it likely that members will return more often to see what is new at the store. I definitely like to see if there are new items. (Many years ago, around the winter holidays, Costco sold a cake by the David’s company and we bought a few on the “97” deal. It was amazing. The details of the cake are not relevant but that has never bothered me before and I like to think about this delicious treat. It was a really fudgy chocolate cake on the bottom and a cheesecake on the top and one of the best desserts I have ever eaten. After finding that treat, I kept wanting to return to see if they had more).
5. A focus on frequently made purchases.
According to the article, Costco sells the items that are most likely to get customers to the stores. Groceries are one of the most common group of items purchased by members. Therefore, by selling groceries, Costco can get customers into the stores where they will likely buy many other items. Similarly, because everyone needs to buy gas, having gas stations with (relatively) cheap gas at many locations (Got gas?) can help get people to the store.
6. Best in class refund policy.
Past posts have talked about Costco’s return policy ((Maybe they are too generous…); (Refund even without asking???)) Although we can question the policy, it certainly makes it less “risky” to buy things there. In addition, I’d guess that, even if some members take advantage of the policy (e.g., the oft cited “Christmas tree return” story, in which the customer returned a Christmas tree to Costco after Christmas was because: “it’s dead”), most people do not. More likely, they decide it’s not with the trip back to the store, or decide that it is not Costco’s fault if they did not happen to like something.
7. A membership that creates a loyal following.
I only took one economics course in college but I will always remember the concept of “sunk costs.” (I actually use it a lot in my work–in a very different field–to emphasize points.) I had never thought of this concept with respect to Costco. Members pay the membership fee ($60 or $120) and then can shop. According to the idea of sunk costs, because they paid to join, members want to “be sure” to make the membership fee worth the cost. Accordingly, they will make many trips to the store. (Logically, once the fee is paid, it doesn’t “save money” to buy extra items or items one doesn’t need. However, emotionally, it feels reassuring to say “well, I just got four pounds of mayonnaise, 75 pens, and a kayak…I sure am glad I spent the money on the membership. I’m using it!”)
In addition, as has been mentioned in other posts, the membership model enables Costco to keep the prices down because the most profit is from the membership fees ((Increase in membership fees; (Costco is getting stricter)).
8. Selling in bulk.
People joke all the time about the bulk quantities at Costco and how one can possibly use them up. For perishable items, many people cannot. However, because people like deals and the prices are so good for the quantities, people get excited and often buy more than they want or need. Of course they would save money if they used the entire amount. However, if a lot remains, they may actually lose money.
According to the article, what generally happens is that after the item is no good, customers toss the rest and begin the cycle again. The cycle definitely happens with produce in my family. I still remember laughing many years ago when we had purchased one of the huge containers of strawberries. Only two people in the house ate them, so one family member would sit with massive bowls of strawberries trying to “beat the (strawberry) clock.” We do the same today with bananas. Although we only eat relatively green bananas, we often buy the entire batch at Costco. However, during the summer, we rarely finish the batch before they turn yellow from the heat. We don’t always use the rest for banana bread, so some are wasted and it would have been cheaper to just buy the four to five bananas we want. But, we fall into the trap of the “good deal.” (Obviously, bananas are not expensive. However, if a lot of members do what we do, especially with more expensive items or foods, it would definitely add up). It is very important to note though, that there are times when one is in Costco and even though it’s “more than one needs,” convenience (and maybe cost of time, gas, etc.) wins and it makes sense to get milk, tomatoes, etc. rather than making another stop.
Were you aware of these strategies? Which tend to get you to spend more?
Cruising Costco 