Price matters, but it’s only one part of the buying equation.
That’s a lesson I learned the hard way when my air conditioning broke over a holiday weekend, and my regular vendor was not answering my texts. I called another service, which sent someone out, quoting me a price of over $2,000 and telling me he could not get the part to make the repair until Wednesday.
As he was telling me this, my guy texted, and when I told him what it was, he said he had the motor in his truck and would be over in a few hours to make the repair. He charged me maybe $400 for the part and $200 for labor.
Now, I’d trust him with anything because, like the other company, he could have told me pretty much any number. It was over 90 degrees on a summer weekend in Florida, so waiting to fix it was not an option.
Costco wins on price most of the time, but that’s not its biggest competitive advantage, even if many customers think that’s why they keep renewing.
What the warehouse club actually sells is trust.
Costco’s members trust the brand
Most of Costco’s members probably know very little of the rigorous process a product must undergo before it gets to Costco’s shelves. They may know even less about how many approvals a new item needs before it can join the Kirkland Signature house brand.
But they do know that nearly everything, if not everything, they’ve bought from the warehouse club has been a quality item.
It’s hard for any company to get shelf space in Costco because the company keeps its product count low. The chain is known for carrying a limited assortment, with buyers carefully vetting new products before they reach store shelves.
This careful curation builds enormous trust, Kathy Gersch, retail specialist and cofounder of consulting firm Kotter International, told Fortune.
“People tell themselves, ‘Costco has done the research for me, and they know this is the best one,'” she notes.
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As a long-term Costco member, I never really thought about it, but my purchasing patterns show that I do place nearly blind faith in the brand. I’ve purchased Kirkland Signature Scotch at more than $40 a bottle without tasting it, and I’ve never questioned whether something I bought there would meet my expectations.
That’s a sort of unspoken pact between Costco and its members. Give the chain $65 for a Gold membership or $130 for an Executive membership, and the company will deliver not only low prices — that part we understand — but also value, which goes beyond price.
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Costco builds trust with members
Costco executives have long argued that maintaining member trust, not simply offering low prices, is what keeps shoppers renewing year after year.
“The most important item we sell is the membership card,” Costco CEO Ron Vachris said. “Everything we do supports that transaction.”
It includes offering low prices, but low prices alone won’t drive membership renewal. Costco clearly understands that price only matters when you offer value.
Costco has delivered that with its overall merchandise, but its Kirkland Signature brand is where the trust with members has been built most strongly.
“Kirkland is a brand in its own right,” Barclay’s Retail Analyst Karen Short told CNN. “It is one of the reasons people go to Costco. That’s not necessarily something you can say about many private labels.”
RTMNexus CEO Dominick Miserandino told TheStreet that Costco has built equity in Kirkland Signature over decades, and that has paid off.
“It’s simple; they’ve established a level of quality and people appreciate that quality of Kirkland brands over the other house brands,” he said.
Kirkland Signature “accounts for around $86 billion in annual sales, or around a third of Costco’s total haul,” according to a Wall Street Journal report from earlier this year.
Costco members pay with loyalty
The warehouse club makes its pact with members clear right on the Company Profile page on its investor website.
“Costco Wholesale Corporation operates an international chain of membership warehouses, mainly under the ‘Costco Wholesale’ name, that carry quality, brand-name merchandise at substantially lower prices than are typically found at conventional wholesale or retail sources,” it shared.
The word “quality” does a lot of work there, but members are clearly happy with the chain, since they renew at high rates.
“In terms of renewal rates, at Q3 end, our U.S. and Canada renewal rate was 92.2%. Up 10 basis points from last quarter. And the worldwide rate came in at 89.7%, unchanged from last quarter,” CFO Gary Millerchip said during the chain’s third-quarter earnings call.
For comparison, annual retention above 90% is exceptional for nearly any paid subscription business, making Costco’s membership model one of the strongest in retail.
Miserandino said he believes that the trust members have in Costco matters as much as its prices.
“Trust and loyalty for any brand is the most valuable asset they can have. In fact, if you feel that sense of trust and loyalty, price is a secondary decision factor,” he told TheStreet.
And of course, in addition to price and trust, Costco does offer a shopping experience that many members enjoy.
“You never quite know what else you’ll find when you’re there,” GlobalData Managing Director Neil Saunders told Fortune. “And there’s always something where you think, ‘I didn’t even know I needed that.'”
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