Costco’s real product is the membership card
The warehouse sells groceries and TVs at thin markups. The profit comes from the annual fee most members keep paying.
Key points
- Costco keeps markups on goods low and earns much of its profit from membership fees.
- Most members renew every year, so that fee income is unusually predictable.
- Walmart’s Sam’s Club uses the same model; traditional discounters make their money on the goods instead.
Most retailers make money on what they sell. Costco makes a large part of its money before you buy anything: the annual fee every member pays to walk through the door.
The goods themselves carry deliberately thin markups. Costco stocks a limited range of products, buys each one in huge volume and passes most of the savings on. Low prices keep members coming back, and members who come back renew their cards. That loop is the business.
Why the fee matters so much
Membership fees are almost pure profit. Renewing a card costs Costco very little, so nearly every dollar flows straight to the bottom line. Fee income is a tiny fraction of Costco’s sales but a large share of its operating profit.
It is also predictable. In the US and Canada, the vast majority of members renew each year. Few retailers can forecast next year’s profit as confidently as one built on renewals like that.
Costco raises the fee only every several years; the most recent increase came in 2024. Each one lifts profit almost immediately, and so far members have kept renewing.
The trade-offs
- Limited choice. A Costco warehouse carries a few thousand products, where a large supermarket can stock tens of thousands. Members accept fewer options in return for lower prices.
- Bulk sizes. Big packs suit families and small businesses better than people shopping for one.
- Thin margins on goods. When costs rise sharply, Costco has little room to absorb them without raising prices.
How rivals compare
Walmart runs the same model through Sam’s Club. Traditional discounters such as Target and Walmart’s own stores take a different route: no fee, much wider choice, and profit made on the goods themselves.
That is why the numbers that matter most in Costco’s results are about membership rather than any single quarter’s sales: how many paid members it has, how many upgrade to the pricier Executive tier, and whether the renewal rate holds.