3 Reasons Costco Has Membership Fees

Costco Wholesale, the members-only big-box discount retailer, charges $60 annually for its lowest-level membership, the Gold Star. For $120 per year, Executive membership offers additional savings, perks, and benefits, as well as cashback on qualified purchases. In September 2024 Costco will increase its membership costs to $65 and $130, respectively.

These fees may seem steep, but Costco relies on a subscription model for three reasons: loyalty, shrinkage reduction, and revenue stream.

Costco Membership

Costco (COST) is a warehouse club that offers consumers bulk goods. Buying in bulk can provide consumers with significant savings when compared to buying consumer items in traditional retail stores. Bulk purchases are particularly beneficial to large households.

Costco provides its value-seeking customers with a variety of products, from apparel to food to home goods to electronics. It's also renowned for its in-house brand, Kirkland Signature, which it started in 1995 to provide better quality products at affordable prices.

In addition to consumer goods and groceries, Costco provides a slew of other products and services, including pharmacy discounts, travel packages, insurance, auto maintenance, and more.

To use all these services as well as purchase from the store, customers require a membership, which comes in two options: Executive and Gold Star.

Costco Membership Tiers

Executive Membership

Costco's Executive membership is its top-tier member's program that costs $120 a year. In addition to providing access to the online and physical stores, two membership cards, and a 100% satisfaction guarantee, the membership comes with an annual 2% reward up to $1,000 and access to Costco Services discounts.

Gold Star Membership

The Gold Star membership comes in at $60 a year and provides all the benefits of the Executive Membership except for the 2% annual reward and access to Costco Services discounts.

Business Membership

Costco also offers both membership options for businesses. The costs and benefits are the same, except there are some additional options for business members, such as the ability to add people to the membership at $60 per person.

Why Costco Has Membership Fees

There are three main reasons why Costco incorporates membership fees for access to its products and services: loyalty, reducing shrinkage, and revenue stream.

Loyalty

American grocery competition is intense. BJ’s Wholesale Club and Sam's Club offer direct competition for Costco. In addition, consumers can choose among Sam's Club parent Walmart Stores (WMT), Target (TGT), and a variety of neighborhood groceries and farmers' markets.

Psychology plays a part in the success of the subscription model. Costco offers membership perks in several countries other than the U.S. The company offers discounted goods and services to members. These include vacations, car insurance, and term life insurance policies. Members can even enjoy discounted pet insurance for Canadian members.

Membership means Costco shoppers belong to a "private" club. Also, the fee motivates action: the money's been spent, so it's best to use the club's advantages.

This thinking gives Costco its most powerful advantage: customers become loyal to the store. Having paid the fee, members are more likely to visit Costco than a non-membership store that confers no special benefits.

Reducing Shrinkage

Costco has found a way to deter theft in its stores: charge people to shop. It's unlikely that shoplifters will spend $60 a year for the opportunity to steal. By controlling entrances and exits in addition to the membership format, Costco believes its shrinkage is "well below those of typical retail operations."

Revenue Stream

In the volatile world that is the grocery business, membership fees provide a stable source of revenue. The company's fiscal year 2023 revenue from membership fees came in at $4.58 billion, which was 1.9% of total sales.

While membership fees are a small percentage of total sales, this steady flow of membership fees helps allow the company to keep prices low and attract and retain more customers.

Revenues from membership fees are great. Aside from a few minutes of an employee’s time, plus the cost of the card and subsequent promotional mailings, managing membership isn't too costly.

How to Sign Up for a Costco Membership

Signing up for a Costco membership is straightforward. Customers can head to the company's website and fill out a membership form online or call Costco's Member Services at 1-800-774-2678 and speak with a representative to sign up. You can also visit a Costco location and sign up in person.

On Costco's website, individuals will have the option of choosing either the Executive membership or the Gold Star membership, and by clicking on the "start saving" button at the end of each membership option, will be taken to a separate page to fill out the membership form.

When the payment has been processed, you will receive an email with your membership number. To pick up your membership card, you will need to bring this email as well as a government-issued photo ID.

The Bottom Line

Costco has consistently low prices with a strong consumer following. With the company expanding both domestically and internationally, as well as profits increasing year over year and its sophisticated logistics network, the company competes with other retail giants, such as Walmart. Membership fees are standard for bulk warehouse retail stores and Costco's membership fees provide it with customer loyalty, a theft deterrent, and a stable revenue stream.