WHY COSTCO SELLS SOME PRODUCTS AT ALMOST NO PROFIT
Costco has a strange retail strategy.
It doesn't always try to make a lot of money from the products sitting on its shelves.
In fact, Costco deliberately keeps its merchandise margins much lower than traditional retailers.
So how does it make money?
THE SECRET IS THE MEMBERSHIP
Costco is not really built like a normal supermarket.
You pay to enter the system.
In the U.S., a standard Costco membership costs $65 per year, while an Executive membership costs another $65. Costco had more than 82 million paid members by February 2026.
That membership creates a completely different business model.
Costco can focus on keeping prices extremely low because customers are already paying for access to the store.
THE MARGINS ARE ACTUALLY VERY LOW
In fiscal 2025, Costco generated about $269.9 billion in merchandise sales.
Its gross margin was about $30.0 billion.
That's only an 11.1% gross margin.
For comparison, many traditional retailers operate with significantly higher merchandise margins.
Costco's own explanation is simple:
LOW PRICES → MORE SALES → FASTER INVENTORY TURNOVER
The company buys enormous quantities, keeps its warehouses relatively simple, limits the number of products it carries, and moves inventory quickly.
That efficiency allows Costco to survive on much smaller margins.
BUT THERE'S ANOTHER REASON
Costco wants you to believe that you're getting an unusually good deal.
And that perception is extremely valuable.
Costco has even said that it doesn't focus on maximizing prices in the short term. Instead, it wants to maintain what it calls its "pricing authority" — the perception that Costco consistently offers highly competitive prices.
Think about what happens when you see a product that's noticeably cheaper than elsewhere.
You trust the store more.
And once you trust Costco's prices, you're more likely to buy something else.
THE $1 PRODUCT CAN SELL THE $500 PRODUCT
A cheap product isn't necessarily there to make money.
It can make you trust the entire store.
You might walk in for a $5 rotisserie chicken.
Then leave with:
A television.
A mattress.
A laptop.
A pallet of drinks.
A $200 grocery bill.
The low-margin products help create the feeling that the entire warehouse is full of deals.
AND THE MEMBERSHIP KEEPS THE MACHINE RUNNING
In fiscal 2025, Costco collected about $5.3 billion in membership fees.
That recurring revenue is one of the foundations of the model.
Costco doesn't need every individual product to generate a huge profit.
It needs members to keep coming back.
And the more often they come back, the more merchandise they buy.
THE REAL BUSINESS MODEL
Costco isn't simply:
BUY CHEAP → SELL EXPENSIVE
It's closer to:
LOW PRICES
↓
MEMBERS SEE VALUE
↓
MEMBERS RENEW
↓
MEMBERS SHOP MORE
↓
COSTCO SELLS HUGE VOLUMES
↓
COSTCO BUYS AT MASSIVE SCALE
↓
LOWER COSTS
↓
EVEN LOWER PRICES
It's a loop.
SIMPLE IDEA
Sometimes the smartest way to make money from a product is not to maximize the profit on that product.
It's to use the product to make customers trust you.
MAACAT PERSPECTIVE
Costco's biggest product isn't actually what's sitting on the shelf.
It's the feeling that you're getting a deal.
Once a company earns that trust, customers can become more valuable than the margin on any single product.
