Costco’s Sales Strategy: How it Gets You to Spend More

Photo of a Costco Store
 

By Tricia McKinnon

Have you ever left a shopping trip at Costco scratching your head as to why you have a new TV that can barely fit into your car while you only made the trip to buy groceries? That’s the Costco effect, it’s not an accident, it’s by design that you end up spending more than you thought you would.

Costco knows how to get customers to spend more money and retailers can learn a lot from the retailer who generated $246 billion in its 2023 fiscal year about what tactics they can employ to boost their own sales. If you are curious about how Costco gets all of us to spend more consider these eight tactics that it has employed to become the third largest retailer in the United States.  

1. Free samples. How many times have you gone to Costco just to try some free samples? We all have. Free samples encourage shoppers to try products they normally wouldn’t buy. Once a customer tries a product sample, likes it and then buys it they have enough of it for months if they are buying in bulk at Costco. Paco Underhill, author of the book Why We Buy says that free samples spur more sales because: they make you “a much less disciplined shopper.” 

Free samples are really just another form of marketing retailers use to generate more sales. Trader Joe’s also uses free samples as an effective form of marketing. Speaking about this Tara Miller, Trader Joe’s vice president of  marketing said: "so what a lot of people might not know is the biggest marketing expense we have at Trader Joe's is actually just letting people try our food.”

Providing free samples whether its food or clothing taps into a universal sales principle called reciprocity. Author Robert Cialdini writes in his best-selling book Influence, the Psychology of Persuasion that: “one of the most potent of the weapons of influence around us [is] the rule for reciprocation. The rule says that we should try to repay, in kind, what another person has provided us.” “By virtue of the reciprocity rule, then, we are obligated to the future repayment of favours, gifts, invitations and the like.”   Retailers like lululemon have also successfully use this strategy to get customer to spend more.

2. Store design. Home many times have you found your shopping cart filled with miscellaneous items you want to buy before you have even arrived at the produce section at Costco? Know that is by design. Costco purposely puts more essential shopping items like salad and milk at the back of the store so that you have to look at all of the discretionary items first. Often at the front of a Costco store are heavily discounted big ticket items like electronics that often spur impulse buys. You really need that new 70 inch TV don’t you? 

Costco’s no-frills design is not an accident. It adds to the perception that Costco is a value oriented retailer. “Costco doesn’t use any fancy decor or lightning, instead, they make sure that their store resembles a warehouse with exposed beams, pallets, and simple metal shelving,” says Mark Ortiz, a marketing expert and founder of Reviewing This. “This is smart because it tricks the consumer into believing that they are purchasing goods at bottom low prices. Logically, you would think, less money spent on decor equals less overhead cost equals the opportunity to lower your prices.”

You are also not imagining things if you feel that every time you step into a Costco the item you are looking for is located in a different area. Costco purposely moves things around forcing customers to walk around to find what they are looking for. Then of course along the way you find many things to buy.

3. Loss leaders. Costco sells commonly purchased items like rotisserie chicken or hotdogs at low prices to get you in the door. Costco’s hotdog combo is actually the same price it was in 1985. Speaking about this Bob Nelson, senior vice president of financial planning and investor relations at Costco said: Costco generates “very little money” on the combo deal, but “we get so much more mileage out of it than we would by raising the price to $1.60 and making a few more million dollars.” The key is for retailers to get customers in the door and once they are there persuade them to buy other products and services. 

4. A “treasure hunt” shopping experience. Costco offers many limited time deals and products enticing customers to go back to Costco often to see what is new and exciting and to make sure they don’t miss out. Retailers like T.J. Maxx and Dollarama also employ a similar strategy and it’s working. Human beings crave novelty and not knowing what you are going to encounter when entering a Costco store has helped the retailer to remain successful. The treasure hunt atmosphere is also a safeguard against online competitors as customers have to go into a Costco store to see what is new and exciting. 

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5. A focus on frequently made purchases. Costco has figured out the type of assortment that is most likely to increase the frequency of customer visits. For example, groceries are one of the most frequently purchased categories and most of Costco members shop at Costco for groceries. Costco also sells gas at some of the lowest prices in the United States. Costco also has great food courts which on their own drive visits. From a customer perspective being able to grab a hot dog at Costco is a nice treat. For Costco it is big business. Costco sells over 150 million hot dog combos yearly. It sold 117 million rotisserie chickens in 2022 and its food courts generate over $1 billion. All of these are deliberate merchandising choices that get customers to spend more money. 

6. Best in class refund policy. Costco has a very liberal return policy where customers can return almost anything they have purchased at anytime. A customer once said that the reason she was returning a Christmas tree to Costco after Christmas was because: “it’s dead”. 

On Costco’s website it says: “we are committed to providing quality and value on the products we sell with a risk-free 100% satisfaction guarantee on both your membership and merchandise.” Having such a liberal return policy is a good way to entice customers to make purchases because if they know they can easily make a return there is less risk in making the purchase.

7. A membership that creates a loyal following. Over 120 million people have a Costco membership. Each member either pays $60 (household or business) or $120 (executive) annually to become part of the club. Once this fee is paid customers treat it like a sunk cost. The investment has been made and now it is time to get value from it. Just the thought that the payment has been made can entice customers to make additional trips to Costco to make sure they get value from their investment. It is a powerful play on human behaviour that helped to generate $4.2 billion in membership fees alone in Costco’s 2022 fiscal year.  

The membership is also economical for Costco as it allows the retailer to reinvest membership fees into low prices for customers. There are many items that are cheaper at Costco than at Amazon. The membership program also helps with Costco’s bottom line with nearly 80% of Costco’s profits coming from membership fees alone.  

8. Selling in bulk. By selling products in bulk Costco entices customers to buy large quantities of items upfront even if the customer cannot possibly finish all of the product before the expiry date. Then once the expiry date passes customers go through the entire process all over again until the next time. The perception of getting a deal often negates the fact that you may not even need all of the product leading to higher purchasing costs and spend with Costco in the long run.

Tricia McKinnonStrategy & GrowthComment