Costco's Membership Model

The roots of the warehouse club

The membership warehouse idea came from Sol Price, who opened Price Club in San Diego in 1976. Jim Sinegal, who had worked for Price, co-founded Costco with Jeffrey Brotman and opened the first warehouse in Seattle in 1983. The two companies merged in 1993, and Costco grew into one of the largest retailers in the world.

Two ways to make money

Most retailers earn their profit from the markup on what they sell. Costco deliberately keeps that markup thin, and its founders set a long-standing rule, widely reported, that markups stay at no more than about 14 percent on name-brand items and 15 percent on its Kirkland Signature store brand. Merchandise sales cover the cost of running the warehouses with only a sliver left over.

The second stream is the membership fee. In September 2024 Costco raised its basic US and Canada fee to $65 a year and its Executive tier to $130. Membership fees are a small share of total revenue, but they are almost pure margin, so they make up a large share of the company's operating profit. At the end of fiscal 2026, the renewal rate in the US and Canada was 92.3 percent.

Why the model reinforces itself

Paying an annual fee makes members want to get their money's worth, so they come back often and buy in bulk. Costco stocks only a few thousand products at a time, far fewer than a typical supermarket. That lets it buy each item in huge volumes, negotiate hard with suppliers and keep the stores simple, with goods sitting on pallets instead of decorative shelves.

Low prices on everyday items, plus famously cheap food court deals like the $1.50 hot dog and drink combo, which has kept the same price since 1985 and is widely described as a loss leader, remind members that the fee is worth it. Happy members renew, and the cycle repeats.

Costco is also known for paying hourly workers more than many retail rivals. Leaders have argued that better pay reduces turnover and training costs and improves service, which supports the same goal: keep members happy enough to renew year after year.

The boss lesson

A recurring fee can turn a low-margin business into a stable, predictable one. The key is that customers must feel they win every visit. Costco's thin markups are not a weakness. They are the reason people keep paying to get in the door.

Any business with loyal, repeat customers, from gyms to software, can ask the same question: is there a way to charge for access and then reward people for coming back?

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