Costco is one of the few retailers that can sell you a television, a block of cheese, and a patio set while making its main profit elsewhere. In fiscal 2025, the company is set to take in about $5.3 billion from membership fees. This is the real machine; the warehouse floor is mostly the theatre.
A conventional retailer has to squeeze profit out of every basket. Costco can afford to look almost stubbornly cheap because the customer has already paid to get through the door. Once access is monetised up front, the merchandise business can run on thin markups, narrow choice, and the kind of predictable value that makes people renew without much drama.
The business
Costco’s model is built in two layers. The visible layer is the warehouse: bulk packs, limited assortment, fast-moving stock, and prices that make comparison shopping feel slightly insulting. The hidden layer is the membership fee, which pays for the privilege of shopping there in the first place.
This changes the job of the retailer. A normal grocer or department store tries to maximise profit on each item sold. Costco tries to preserve a relationship. If the member consistently feels they are getting a better deal than elsewhere, the fee keeps renewing and the whole structure keeps working.
The numbers show how unusual that is. Costco reported $4.58 billion in membership-fee revenue in fiscal 2023, alongside $6.29 billion in net income. By fiscal 2025, the fee line is expected to reach $5.3 billion. This is not a side hustle; it is a profit engine large enough to shape how the company prices nearly everything else.
Where the money goes
Costco can live with merchandise markups that would make other retailers uncomfortable. Its markup cap is commonly described as 14 percent on branded goods and 15 percent on Kirkland Signature items, often running below those ceilings. Gross margin on merchandise usually sits around 10 to 12 percent, far leaner than the 20s you see at retailers that depend on product margin for their living.
That thin margin is not a weakness; it is the point.
Low prices are not a charity gesture or some vague brand halo. They are the mechanism that protects renewal rates. In the U.S. and Canada, Costco’s membership renewal rates stay above 90 percent. Members are not paying to admire the shelves. They are paying because the shelves save them enough money, time, or both to make the fee feel cheap.
The same logic explains Costco’s curation. Limited choice is not a bug in the model; it is the trade. Fewer stock-keeping units mean easier buying, faster turns, and less operational mess. The warehouse is designed to keep costs down so the company can keep the merchandise promise intact. The customer gets the sense that everything is priced aggressively. Costco gets the recurring fee that makes that aggression sustainable.
The comparison set
Costco is not alone in this structure. Many businesses split value creation from profit capture. The best ones are very clear about which layer does which job.
| Business type | What pulls the customer in | What pays the bills |
|---|---|---|
| Gym | Access to equipment, classes, facilities | Monthly membership fees |
| Marketplace | Selection, convenience, reach | Seller fees, ads, subscriptions |
| Financial platform | Easy trading, low apparent cost | Payment for order flow, cash balances, margin lending |
| Razor and blade | Cheap starter product | Recurring consumables |
| SaaS | Useful software | Subscription fees |
Planet Fitness charges low monthly fees and counts on volume. Equinox goes the other way and sells a premium identity along with the workout. Amazon and eBay use the marketplace to attract buyers, then charge sellers and advertisers for access to that traffic. Robinhood made commission-free trading the hook, then looked for profit in other parts of the relationship. Gillette and Nespresso built a classic razor-and-blade arrangement, where the starter item is the invitation and the repeat purchase is the real prize.
The common thread is simple. One layer attracts; the other layer monetises. Confuse the two, and you end up either underpricing the thing you meant to sell or overcharging the thing that was only supposed to bring people in.
What was knowable
Costco’s model looks obvious now because the numbers have been stable for years, but that does not make it easy to copy. You can see the temptation from the other side of the table. If you were running a traditional retailer, why would you deliberately leave margin on the shelf?
The shelf is not the profit pool. The membership base is.
This means the real risk is not that Costco sells a tin of biscuits too cheaply. The risk is that the member stops renewing. Once that happens, the whole arrangement weakens. A business built on access fees lives and dies by perceived value. The price on the shelf has to feel like a bargain often enough, across enough visits, that the renewal decision becomes automatic.
This also explains why businesses with two layers need discipline. A gym that gets greedy with extra fees can damage the member experience that justifies the monthly charge. A marketplace that annoys buyers or sellers can hollow out the traffic that makes the fee side valuable. A software platform that loads on features no one asked for can end up with a bloated product and no clearer monetisation.
What this means
Costco is a reminder that the deepest profit pool is not always where the customer first meets the business. Sometimes the product is the hook and access is the business. Sometimes the low-margin layer is there to justify the high-margin one. Sometimes the “cheap” thing is only cheap because someone has already paid for the right to buy it.
This is the useful lesson for anyone running a business with two economic layers. Identify which layer creates the pull, which layer captures the money, and how much margin you can sacrifice on the first without breaking the second. Get that balance wrong and you get a confused business. Get it right and you can sell low, renew high, and let the arithmetic do the talking.