Costco Case Study

Topics: Costco, Warehouse club, Profit Pages: 8 (2351 words) Published: December 8, 2012
1ST Case Study
Describe Costco’s Business Model. Description must identify and describe model components.
Costco’s business model includes a couple of techniques. The first technique is consumers must purchase memberships to be allowed to shop within the stores. The other business model that is followed is a low-markup on products to keep prices low and increase repeat purchases. With members purchasing a year-long membership, Costco is essentially selling what could be considered a year-long subscription to their services. The low pricing business model encourages repeat business because consumers enjoy feeling as if they received a real value on items they purchased. Discuss how each component impacts profit generation. Membership fees impacts profit generation by allowing Costco to generate income by just giving members the right to shop within the warehouse stores. In 2006, Costco had almost 50 million members. These membership fees increased income by almost 1.2 million dollars that year. Costco’s other business model of low pricing also increases profits. By Costco setting a maximum markup on products of 14%, members are almost guaranteed that they will not be able to find the comparable product cheaper. They are able to keep these markups low by limiting the amount of available products, which reduces costs for Costco. Even though Costco generates less profit per product sold with this business model, they experience an increased sales volume of these products to increase profits.

Describe Costco’s Strategy
Identify strategy elements: include specifics that communicate how Costco employs each element. Costco uses multiple business strategies to accomplish their goals. These strategies include pricing, product selection, treasure-hunt merchandising, marketing and advertising, growth strategy, and web site sales. They use a pricing strategy of keeping prices low while selling larger quantities of these items to produce profits. With product selections, Costco limits the amount of available products to reduce expenses. They also entice more people to visit the warehouses regularly by offering one-time buys that they consider to be treasure-hunt merchandising. Costco does not pay for widespread advertising since people are familiar with Costco and the bargains they offer. Another strategy which Costco uses is a growth strategy. This strategy is used when they open new stores or when they increase products available under the Kirkland Signature brand. The final strategy they use is the introduction of web site sales. They use these web sites to increase sales to members whose local warehouse may not offer certain products.

What each is designed to accomplish. The pricing strategy Costco uses is designed to increase the quantities of items sold. Even though they generate less profit per item sold, the increased amount of items sold increases profits. This strategy also helps to increase repeat purchases. If a customer believes they are receiving a deal, they are much more likely to return and make the same purchase again. Costco’s low pricing strategy is encouraging consumer loyalty.

Costco’s limited product selection strategy is designed to lower operating costs and to simplify operations. This strategy allows Costco to stock one size of most products versus all sizes available of that product. They can increase turnover by selecting the sizes, colors, and models that are most popular and sell the fastest. Even though some products are offered in sizes that sometimes are too large for the normal consumer, Costco believes that they may lose only two out of ten sales by this limited selection. The decreased cost of stocking and other operational costs makes up for the lost sales. Efficiency is important to Costco’s limited selection strategy.

The next strategy which Costco employs to increase profits is a treasure-hunt merchandising strategy. This strategy helps to increase...
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