Costco Business Model: How It Makes Billions With Low Prices
Walk into Costco and the economics can seem almost backwards.
The warehouse sells enormous packs of groceries, televisions, furniture, medicine, gasoline and even gold while deliberately trying to keep prices low. Its stores are comparatively plain. Products frequently sit on shipping pallets. There are fewer choices than in a conventional supermarket. And the company has built part of its reputation around famously inexpensive products such as its $1.50 hot-dog-and-soda combination, which Costco still advertises today.
Yet Costco is hardly operating like a discount business struggling to survive.
In its fiscal year ended August 30, 2026, Costco reported $297.2 billion in net sales, $303.2 billion in total revenue and $9.23 billion in net income. Membership fees alone produced approximately $5.91 billion.
So how can a company make billions while deliberately avoiding the large merchandise margins that many retailers pursue?
The answer is the Costco business model.
Costco does not try to maximize the profit earned from every product. Instead, it tries to maximize member value, shopping frequency, purchasing volume and membership retention.
Low prices attract members.
Membership fees help cover operating costs.
Huge purchasing volumes give Costco bargaining power.
A tiny product assortment concentrates that purchasing power.
Fast inventory turnover reduces the amount of capital tied up in stock.
Kirkland Signature gives Costco control over quality, price and private-label economics.
And satisfied customers renew their memberships year after year.
Each element reinforces the others.
That creates one of the most unusual business models in global retail.
Costco Business Model in Numbers
| Metric | Fiscal 2026 / Latest Reported |
|---|---|
| Net sales | $297.2 billion |
| Total revenue | $303.2 billion |
| Membership-fee revenue | $5.91 billion |
| Net income | $9.23 billion |
| Paid memberships | 84.1 million |
| Total cardholders | 150.4 million |
| Executive memberships | 42.3 million |
| Worldwide membership renewal rate | 89.8% |
| U.S. and Canada renewal rate | 92.3% |
| Executive-member share of sales | 75.6% |
| Warehouses worldwide | 939 |
| Q4 gross margin | 11.02% |
Costco reported the membership figures with its September 2026 fiscal-year results.
Those numbers reveal the central logic of the Costco business model.
Costco operates at enormous scale while accepting merchandise margins that would look surprisingly thin for many retailers.
1. Costco Makes Money Before You Buy Anything
The first major advantage of the Costco business model is that customers pay for permission to shop.
In the United States, a standard Gold Star membership currently costs $65 per year, while an Executive membership costs $130 per year. Executive members can receive a 2% reward on qualifying purchases, subject to Costco’s terms and annual cap.
This is fundamentally different from a normal supermarket.
A supermarket must persuade a shopper to buy products before it generates revenue from that customer.
Costco can collect membership revenue before the customer buys a television, bag of rice or gallon of milk.
In fiscal 2026, those fees totaled about $5.9 billion.
Interestingly, membership fees represented only about 2% of Costco’s total revenue.
They are small relative to nearly $300 billion in merchandise sales.
But they are extremely important economically.
Costco itself explains that membership fees help offset operating costs, allowing the company to price merchandise at lower margins.
That is one of the most important secrets of the Costco business model.
Instead of relying entirely on product markups to fund the company, Costco receives a recurring stream of membership income.
2. Membership Revenue Changes the Retail Equation
Imagine two hypothetical retailers.
Retailer A earns nothing unless customers purchase products.
Retailer B charges millions of customers an annual fee and then sells merchandise.
Retailer B can afford to think differently about merchandise margins.
It can use aggressive pricing partly as a reason for customers to continue paying the annual fee.
That is essentially the Costco business model.
Membership fees and low merchandise prices support each other.
The customer thinks:
“I am paying for this membership, so I should use it.”
More visits can generate more purchases.
More purchases make the membership feel valuable.
Greater perceived value makes renewal more likely.
Renewal produces another membership fee.
And the cycle begins again.
This is why Costco’s renewal rates matter so much.
At the end of fiscal 2026, Costco reported a 92.3% membership renewal rate in the United States and Canada and 89.8% worldwide.
For a subscription-style business, that is powerful.
The company does not need to replace its entire customer base every year.
Most members stay.
3. Costco Accepts Surprisingly Thin Merchandise Margins
Many businesses try to maximize gross margin.
Costco deliberately operates differently.
Its fiscal 2026 figures imply a merchandise gross margin of roughly 11.1% based on net sales and merchandise costs, while Costco reported a fourth-quarter gross margin of 11.02%.
That means most of the money Costco collects from merchandise sales goes directly toward the cost of the merchandise itself.
Why accept such thin margins?
Because the Costco business model is designed around volume.
Consider two simplified businesses.
| Business | Sales | Gross Margin | Gross Profit |
|---|---|---|---|
| Retailer A | $1 billion | 30% | $300 million |
| Retailer B | $3 billion | 11% | $330 million |
The lower-margin business can still generate more gross profit if it sells vastly more merchandise.
That is essentially Costco’s strategy at enormous scale.
Costco describes its own model as combining low prices with high sales volumes and rapid inventory turnover, allowing the company to operate profitably at significantly lower gross margins than many traditional retailers.
That sentence captures the Costco business model better than almost anything else.
4. Costco Sells Far Fewer Products Than a Normal Supermarket
A giant Costco warehouse looks as though it contains almost everything.
In reality, the assortment is remarkably small.
Costco says its warehouses carry about 4,000 stock-keeping units, or SKUs, compared with roughly 30,000 at many supermarkets.
This is a huge strategic advantage.
Suppose a normal supermarket wants to sell ketchup.
It might carry:
regular ketchup,
organic ketchup,
low-sugar ketchup,
spicy ketchup,
several bottle sizes,
and multiple brands.
Costco might select only a few high-volume options.
Suddenly Costco can tell a supplier:
Instead of dividing our ketchup purchases among 15 products, we may purchase an enormous quantity of yours.
That concentrates purchasing power.
The Costco business model effectively trades consumer choice for negotiating strength and efficiency.
Members receive fewer options.
But the products Costco chooses can move in enormous quantities.
5. Fewer Products Give Costco More Buying Power
Retailers often negotiate based on volume.
A supplier may accept a lower price per unit if it receives a huge order.
Costco’s limited assortment magnifies this effect.
Imagine Costco has $100 million available to purchase a certain category.
If that money is divided among 100 products, each supplier receives relatively modest volume.
If it is concentrated among 10 products, the winning suppliers can receive enormous orders.
Costco becomes an extremely valuable customer.
That gives the company leverage when negotiating:
purchase prices,
packaging,
product specifications,
production volumes,
distribution,
and promotional arrangements.
Costco explicitly identifies volume purchasing and efficient distribution as important reasons it can operate with lower gross margins.
This part of the Costco business model creates a powerful flywheel:
fewer products lead to higher purchasing volume per product, which can improve Costco’s negotiating position, which can lower unit costs, which helps Costco offer lower retail prices.
6. Bulk Packaging Reduces Cost Per Unit
Costco rarely sells one tiny package when it can sell a large one.
That is not merely a customer-value strategy.
It also improves retail economics.
Imagine selling twelve cans individually.
A retailer may need twelve separate transactions, shelf placements and stocking interactions.
Sell those twelve cans together and many costs can be spread across the entire package.
Bulk merchandise can reduce:
packaging complexity,
shelf-stocking work,
individual handling,
and transaction costs per unit sold.
The customer benefits if the per-unit price falls.
Costco benefits because each transaction becomes larger.
This is why the Costco business model naturally produces enormous shopping carts.
A customer may enter intending to buy milk and toilet paper but leave with groceries, batteries, clothing and a television.
High average transaction values help compensate for low margins.
7. Costco Wants Inventory to Move Quickly
Inventory sitting in a warehouse costs money.
Retailers must finance it.
Store it.
Insure it.
Track it.
Protect it.
And eventually discount it if demand disappears.
Costco attempts to move products quickly.
Its filings repeatedly describe rapid inventory turnover as a central part of the Costco business model.
Fast turnover creates several advantages.
Products spend less time occupying warehouse space.
Costco can replenish high-demand merchandise rather than maintaining enormous varieties.
There is less opportunity for inventory to become obsolete.
And cash from sales returns more quickly to the business.
This becomes especially important when multiplied across hundreds of billions of dollars in annual sales.
Small efficiency improvements at Costco’s scale can become financially enormous.
8. The Warehouse Itself Is Designed to Be Cheap to Operate
Costco stores are not trying to resemble luxury department stores.
That is deliberate.
Products may arrive on pallets and remain there.
Warehouses use industrial shelving.
Fixtures are functional.
Decor is minimal.
Many products stay in shipping cartons.
The Costco business model treats the building primarily as a highly efficient place to distribute products rather than as an elaborate showroom.
Costco says reduced merchandise handling and no-frills, self-service warehouse facilities are important to its ability to operate at lower margins.
This creates another reinforcement loop.
Lower operating costs make lower prices easier to sustain.
Lower prices create greater member value.
Greater member value supports renewals.
Membership revenue then helps offset operating expenses.
That is why simply copying Costco’s product prices would not necessarily allow another retailer to copy the Costco business model.
The entire cost structure has to work together.
9. Kirkland Signature Is Much More Than a Store Brand
One of Costco’s most important competitive assets is Kirkland Signature.
Costco reported that Kirkland Signature generated approximately $90 billion in annual global revenue in fiscal 2025. The company also said Kirkland products typically offer 15% to 20% savings compared with equivalent national-brand products while targeting equal or better quality.
Ninety billion dollars would make Kirkland an enormous business even if it existed independently.
But within the Costco business model, Kirkland performs several functions at once.
It can provide members with lower-priced alternatives.
It gives Costco greater control over product specifications.
It differentiates Costco from competing retailers.
And private-label merchandise can offer Costco attractive economics while still being cheaper than national-brand alternatives.
A Kirkland product also gives customers another reason to maintain their membership because many Kirkland products cannot simply be purchased at a rival supermarket.
That strengthens loyalty.
10. Executive Members Are Especially Valuable
The higher-priced Executive membership provides another layer to the Costco business model.
Executive members pay $130 annually and can receive a 2% reward on qualifying purchases.
Why would Costco return money to its heaviest shoppers?
Because the reward creates an incentive to consolidate spending at Costco.
A member thinking about furniture, tires, groceries or travel may calculate that purchasing more through Costco increases the annual reward.
That can increase customer loyalty and shopping frequency.
By the end of fiscal 2026, Costco had 42.3 million Executive memberships, and Executive members generated approximately 75.6% of worldwide sales.
That is extraordinary.
The company’s most engaged membership tier is responsible for roughly three-quarters of sales.
The Costco business model therefore does not merely seek members.
It seeks highly engaged members who increasingly make Costco part of their normal household spending.
11. Low Prices Can Be a Customer-Acquisition Strategy
Most companies view a lower price as money lost.
Costco can sometimes view lower pricing as an investment in member value.
That difference is fundamental.
In Costco’s fiscal 2026 fourth-quarter presentation, the company highlighted several Kirkland Signature price reductions, including walnuts reduced from $13.79 to $9.99 and Colombian whole-bean coffee reduced from $21.99 to $19.99.
Costco’s 2026 earnings release also disclosed that part of a non-recurring benefit from tariff refunds was reinvested in increased member value.
The immediate economic question might be:
Why not keep every available dollar as profit?
The Costco business model takes a longer-term view.
If members repeatedly see attractive prices, they are more likely to believe the membership pays for itself.
That trust can support higher spending and stronger renewal rates.
The News Ink’s coverage of how tariffs can filter through to consumer prices provides useful context for why retailers must constantly decide whether to absorb costs, pass them to consumers or offset them elsewhere.
12. Costco Makes the Membership Feel Valuable in Multiple Ways
Groceries alone do not explain Costco.
The company has expanded the membership proposition across categories such as:
gasoline,
pharmacy,
optical services,
hearing aids,
tires,
travel,
electronics,
jewelry,
business supplies,
and e-commerce.
Each additional category potentially increases the value of remaining a member.
A customer who saves money on gasoline may maintain membership even during a year when grocery spending falls.
Another customer may value Costco Travel.
Someone else may buy tires.
This diversification makes the Costco business model more resilient.
It also increases opportunities for members to visit Costco or interact with its digital services.
Costco’s digitally enabled comparable sales grew 19.5% in fiscal 2026’s fourth quarter, while site and app traffic increased 30%.
So the warehouse model is increasingly connected to digital retail rather than being replaced by it.
13. Costco Benefits From Scale
Scale is one of Costco’s most difficult advantages for a competitor to reproduce.
As of September 2026, Costco operated 939 warehouses worldwide, including 647 in the United States and Puerto Rico and 115 in Canada.
It also had more than 150 million cardholders.
That scale gives Costco enormous purchasing power.
Consider a supplier deciding whether to negotiate aggressively with Costco.
Winning access to Costco’s customer base could mean extremely large production runs.
That can justify:
lower per-unit manufacturing costs,
dedicated packaging,
large purchasing commitments,
and streamlined distribution.
Costco benefits from the supplier’s scale.
The supplier benefits from Costco’s demand.
Members can benefit from lower prices.
This is another reason the Costco business model becomes stronger as the company grows.
14. Why Costco Does Not Need Huge Advertising Campaigns for Every Product
Traditional retailers frequently spend heavily convincing customers to visit.
Costco’s membership structure changes that relationship.
A person who has already paid $65 or $130 has a built-in reason to return.
The membership fee creates a subtle form of commitment.
Customers want to recover the value of the money they have already spent.
Costco can then focus heavily on maintaining that value proposition.
This does not mean Costco has no marketing expenses.
But the Costco business model begins each year with millions of customers who have effectively purchased a relationship with the retailer.
That relationship is far stronger than an occasional supermarket visitor choosing whichever store has the best coupon this week.
15. The Famous $1.50 Hot Dog Explains the Philosophy
Few products explain Costco better than its hot-dog-and-soda combination.
Costco still advertises the food-court combination at $1.50.
From a narrow perspective, Costco could ask:
How much more could customers be charged?
But that is not necessarily the most important question within the Costco business model.
The more important question is:
What does this price communicate to members?
It tells them Costco is serious about value.
The same logic can apply across other highly visible items.
A memorable low price can reinforce the customer’s broader belief that the entire membership provides savings.
Retail economics is not only about the profit earned from one hot dog.
It is also about what the hot dog makes a member believe about Costco.
16. Costco Creates a Treasure-Hunt Effect
The limited assortment has another consequence.
Products change.
Some appear temporarily.
Others disappear.
Seasonal merchandise arrives.
Premium products occasionally appear at surprising prices.
This creates what Costco has historically described as a treasure-hunt shopping experience.
Customers cannot always assume an interesting product will still be available several weeks later.
That can encourage immediate purchasing.
It also makes warehouse visits less predictable than visiting a conventional supermarket carrying essentially the same permanent assortment every week.
The Costco business model therefore combines predictability and uncertainty in an unusual way.
Customers expect consistently low prices.
But they do not always know exactly what products they will discover.
That can increase browsing and impulse purchases.
17. Costco Can Earn Billions Without Making Much on Each Individual Item
This is perhaps the most important misconception to correct.
Costco does not need enormous profit on every item.
It needs the entire system to produce enough profit.
Fiscal 2026 illustrates this clearly.
Costco produced approximately:
| Fiscal 2026 Result | Amount |
|---|---|
| Merchandise net sales | $297.2 billion |
| Membership-fee revenue | $5.9 billion |
| Total revenue | $303.2 billion |
| Operating income | $11.7 billion |
| Net income | $9.2 billion |
Membership-fee revenue was equivalent to roughly half the company’s operating income.
That does not mean membership fees equal half of Costco’s profit, because Costco does not separately assign all membership-related costs and the accounting categories are different.
But the comparison demonstrates just how economically important recurring membership revenue is.
Without that revenue stream, maintaining the same low-margin merchandise strategy would be much more difficult.
18. Why Customers Do Not Simply Cancel Their Memberships
A membership business only works when customers renew.
This is where Costco’s strategy becomes particularly powerful.
Members do not evaluate the annual fee in isolation.
They mentally compare it with the total value they believe they received from:
lower grocery prices,
gasoline,
Kirkland products,
bulk purchases,
travel,
pharmacy services,
major purchases,
and Executive rewards.
If perceived savings exceed the membership fee, renewal becomes an easy decision.
That explains why renewal statistics are among the most important numbers in the Costco business model.
A worldwide renewal rate close to 90% means Costco begins each year with an enormous base of returning customers.
19. Inflation Can Actually Make the Membership Proposition More Important
Periods of rising prices create difficulties for retailers.
Suppliers charge more.
Transportation costs rise.
Labor becomes more expensive.
Consumers become more price sensitive.
The News Ink’s coverage of U.S. inflation and rising household costs shows why changes in everyday prices can quickly affect consumer behavior.
For Costco, inflation creates both risk and opportunity.
The risk is obvious: Costco must manage higher product and operating costs while trying to protect its low-price reputation.
The opportunity is that consumers become more motivated to seek value.
If households believe a Costco membership helps reduce their overall grocery, gasoline or household-goods bills, the membership can become more—not less—important during expensive periods.
This dynamic helps explain why value perception sits at the center of the Costco business model.
20. Consumer Spending Still Matters
Costco is powerful, but it is not immune to economic conditions.
Customers can delay buying:
furniture,
electronics,
jewelry,
appliances,
and other discretionary products.
The News Ink’s analysis of the U.S. economic slowdown and weakening consumer spending demonstrates why retailers watch household demand carefully.
Costco partially reduces this vulnerability because groceries and basic household supplies generate recurring traffic.
A member may postpone purchasing a television.
They still need food.
This combination of necessities and discretionary merchandise allows the Costco business model to generate regular traffic while retaining opportunities for much larger purchases.
Costco vs a Traditional Retailer
| Traditional Retail Approach | Costco Business Model |
|---|---|
| Free access to store | Paid membership |
| Large product selection | Roughly 4,000 SKUs |
| Higher merchandise margins common | Deliberately low margins |
| Frequent promotional pricing | Strong emphasis on everyday value |
| Smaller package sizes | Bulk and multipack purchasing |
| Elaborate shelving/display possible | Warehouse-style presentation |
| Profit depends heavily on merchandise | Merchandise plus recurring membership revenue |
| Numerous competing brands per category | Limited carefully selected products |
| Private label may supplement brands | Kirkland Signature is strategically central |
| Customer acquisition repeatedly required | Membership encourages repeat visits |
The difference is not that Costco discovered one clever trick.
It constructed an entire retail system around a different objective.
Could Another Retailer Simply Copy Costco?
In theory, many parts of Costco are easy to understand.
Sell in bulk.
Use warehouses.
Charge membership fees.
Carry fewer products.
Develop a private label.
Keep margins low.
In practice, reproducing the Costco business model is extremely difficult.
A new competitor does not immediately have 84 million paying memberships.
It does not have more than 150 million cardholders.
It does not have Costco’s purchasing scale.
It does not have Kirkland Signature.
It does not have decades of supplier relationships.
And most importantly, it does not automatically have customer trust.
Low-margin retail becomes much easier when hundreds of billions of dollars move through the system.
A smaller company attempting the same prices without the same volume can simply lose money.
Scale is therefore not a side effect of the Costco business model.
It is one of its defenses.
Is Costco Really Cheap on Everything?
No retailer is guaranteed to have the lowest price on every item at every moment.
Costco’s value proposition is broader.
Bulk packaging can lower unit prices, but customers must actually consume what they purchase.
A huge package that goes to waste is not economical.
Local supermarkets can sometimes beat Costco through promotions.
Online retailers may offer lower prices on specific products.
Costco members therefore still benefit from comparing:
unit prices,
package sizes,
quality,
and actual household consumption.
The Costco business model depends on members believing the total relationship provides value, not on proving that every individual item is always the cheapest product anywhere.
Is Membership Revenue Costco’s Entire Profit?
No.
This statement is often oversimplified online.
Costco earns significant merchandise gross profit.
In fiscal 2026, net merchandise sales were approximately $297.2 billion while merchandise costs were approximately $264.3 billion, leaving roughly $33 billion before selling, general and administrative expenses and other operating items.
Membership revenue is extremely important, but Costco would not generate its current economics if merchandise operations produced no gross profit.
The more accurate explanation is:
Membership fees allow Costco to operate comfortably with unusually thin merchandise margins while the enormous merchandise business still generates substantial gross profit.
That distinction matters.
Why the Costco Business Model Works
Everything ultimately comes back to one economic loop.
Customers pay Costco for membership.
Costco uses its enormous membership base to generate huge purchasing volume.
Huge volume improves purchasing economics.
Limited SKUs concentrate purchasing power further.
Warehouses minimize handling and operating costs.
Fast inventory turnover improves efficiency.
Kirkland adds differentiation and attractive private-label economics.
Costco passes a substantial portion of those efficiencies back through lower prices.
Customers perceive value.
They spend more.
They renew.
And Costco receives another year of membership revenue.
The Costco business model then repeats the cycle.
Frequently Asked Questions
How does Costco make most of its money?
Costco generates the overwhelming majority of its revenue from merchandise sales, while membership fees are disproportionately important to profitability because they help offset operating costs and enable Costco to maintain relatively low merchandise margins.
How much money did Costco make in 2026?
For fiscal 2026, Costco reported approximately $303.2 billion in total revenue and $9.23 billion in net income.
How much does Costco make from memberships?
Costco generated about $5.91 billion in membership-fee revenue during fiscal 2026.
How many Costco members are there?
At the end of fiscal 2026, Costco reported approximately 84.1 million paid memberships and 150.4 million total cardholders worldwide.
Why can Costco keep prices so low?
The Costco business model combines membership fees, high purchasing volume, a limited product assortment, efficient distribution, rapid inventory turnover, bulk packaging and low-cost warehouse operations. Costco says membership fees also help offset operating costs.
Why does Costco sell so few products?
Carrying fewer SKUs concentrates purchasing volume among selected products. Costco currently says warehouses carry roughly 4,000 SKUs compared with around 30,000 at many supermarkets.
How important is Kirkland Signature?
Very important. Costco said Kirkland Signature generated approximately $90 billion in global annual revenue in fiscal 2025 and typically offers savings of 15% to 20% compared with national-brand equivalents.
Why do people keep renewing Costco memberships?
Members may receive value through merchandise prices, bulk products, Kirkland Signature, gasoline, services and other benefits. Costco’s fiscal 2026 renewal rate reached 92.3% in the U.S. and Canada and 89.8% worldwide.
The Real Secret Behind Costco’s Billions
There is no contradiction between Costco making billions and Costco trying to keep prices low.
Low prices are part of how Costco makes billions.
That is the central insight behind the Costco business model.
Instead of extracting the maximum possible profit from every shopping trip, Costco tries to create enough value that customers willingly pay to remain customers.
Membership turns loyalty into recurring revenue.
Low prices reinforce membership.
Scale lowers purchasing costs.
Limited selection concentrates buying power.
Bulk packages increase sales volume.
Fast inventory turnover improves efficiency.
No-frills warehouses hold operating costs down.
Kirkland strengthens both value and differentiation.
And millions of members return year after year.
By fiscal 2026, that system had grown to 939 warehouses, 84.1 million paid memberships, more than 150 million cardholders and more than $303 billion in annual revenue.
The brilliance of the Costco business model is therefore not that the company discovered how to make enormous margins.
It discovered how to become enormously profitable without needing enormous margins.
And that is precisely why competitors find Costco so difficult to copy.
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