How Costco's membership fees are key to keeping the wholesale club profitable

"Costco is the world's third-largest retailer by sales, but that's not the main way it makes money. Most of the company's profits actually come from membership fees. The club model means Costco has more in common with Netflix than it does with Walmart. It's no secret that people buy a staggering amount of stuff at Costco. The wholesale club saw net sales of nearly $270 billion last fiscal year, and shoppers can't get enough of the chain."

"Despite selling billions of dollars' worth of merchandise, Costco generally doesn't profit from those sales as much as typical retailers like Walmart or Target do. Last year's average merchandise markup, or gross margin percentage, was around 11% at Costco - far less than the 25% to 50% commonly estimated for businesses selling similar products. Factoring in other costs, like payroll and utilities, meant the company retained about $5 billion from its top-line sales last year, before taxes."

"Meanwhile, membership fees are about as close to pure profit as a company can get, and Costco raked in over $5.3 billion in fees from 68.3 million households and 12.7 million businesses. (Costco allows two authorized cardholders per household membership.) Renewal rates are also remarkably high - 92.2% in the US and 89.7% worldwide as of last quarter - which gives the company a comfortable financial position to operate from each year."

Costco ranks as the world's third-largest retailer with nearly $270 billion in net sales, but the company earns most of its profits from membership fees. Merchandise margins average about 11%, well below the 25%–50% typical for similar retailers, and after operating costs Costco retained roughly $5 billion before taxes. Membership revenue exceeded $5.3 billion from 68.3 million households and 12.7 million businesses, with two authorized cardholders allowed per household. Renewal rates are very high—92.2% in the US and 89.7% worldwide—so membership fees account for more than half of total profits and support stricter enforcement of membership rules.

Read at Business Insider