How Costco Built a Cult Following (and Why People Pay to Shop There)

In 1985, a Costco executive walked into Jim Sinegal's office with a straightforward proposition: the hot dog and soda combo — a $1.50 deal the company had offered since opening — should be raised to $1.75. Inflation had eroded the margin. The math made sense. Sinegal listened, then responded in the way that only a co-founder who answers to no quarterly pressure point can: "If you raise the effing hot dog, I will kill you." The price has not changed since. It was $1.50 in 1985. It is $1.50 today.

That story is not a quirky footnote in Costco's history. It is the entire business philosophy in a single anecdote. Costco is a $400 billion company that makes almost no profit from the products it sells. Its gross merchandise margin hovers around 10 to 13 percent — a fraction of what Walmart, Target, or Amazon extract from their supply chains. Conventional retail wisdom says this is insane. Costco's financials say otherwise. In fiscal year 2024, the company generated $249.6 billion in revenue and $7.37 billion in net income. Nearly every dollar of that profit came not from selling you a 48-pack of paper towels, but from charging you for the right to walk in the door.

This is the story of how a 1976 experiment in a converted airplane hangar in San Diego became the third-largest retailer on earth — and built one of the most loyal customer bases in the history of commerce.

The Man Who Invented the Model

The story does not start with Costco. It starts with Sol Price. In 1976, Price opened Price Club in San Diego in a converted airplane hangar on Morena Boulevard. The concept was radical: a members-only warehouse where businesses could buy in bulk at near-wholesale prices. The warehouse itself was stripped down — no fancy displays, no mood lighting, no salespeople — just pallets of merchandise stacked to the ceiling. The savings came from stripping out every unnecessary cost and passing them directly to members.

Price Club initially served only small businesses. But Price discovered something unexpected: by opening membership to a selected group of non-business consumers, the buying volume increased dramatically, and the savings he could offer deepened further. The warehouse club model — charge for membership, sell at the lowest possible margin, make money on the fee — had found its logic.

Jim Sinegal was working under Sol Price as executive vice-president of merchandising when he absorbed this model from the inside. In 1983, Sinegal and co-founder Jeff Brotman opened the first Costco warehouse in Seattle, Washington. The model was identical to Price Club's in its essentials — but Sinegal had his own conviction about how far to push it. Where Price Club was disciplined about margins, Costco was dogmatic. The rule was simple and non-negotiable: Costco would never mark up any product more than 15 percent above cost. Ever. Not 16%. Not during a supply chain crunch. Not to boost a quarterly number. Fifteen percent and not a dollar more.

The result was a company that grew faster than anyone had grown a retailer in American history. Costco became the first company ever to reach $3 billion in sales in under six years. In 1993, Costco and Price Club merged to form PriceCostco — 206 locations generating $16 billion in annual sales. By the late 1990s, the company had taken the Costco name exclusively and was accelerating into one of the most improbable success stories in retail.

The Membership Fee: The Most Elegant Business Model in Retail

Here is the number that explains everything about Costco: in fiscal year 2024, the company collected $4.828 billion in membership fees. In that same year, Costco's net income was $7.37 billion. That means membership fees — money collected before a single item is sold — represented approximately 65% of total net income. If you stripped out the membership revenue and kept everything else, Costco's merchandise operation would barely break even.

This is not an accident. It is the design. Costco deliberately operates its merchandise business at the thinnest possible margin because the goal is not to profit from selling you goods — it is to convince you to pay for the membership, and then to renew it every year. And the way you convince someone to renew a membership is by making them feel, year after year, that the value they're extracting from the warehouse far exceeds the $65 or $130 they paid to enter it.

As of late 2024, Costco had 77.4 million paid memberships — up 7.6% year-over-year — with 47% holding the premium Executive membership at $130 per year. Executive members receive 2% cash back on purchases, up to $1,250 annually. For a family spending $30,000 a year at Costco (not unusual for a household that does its grocery, household, and gas purchasing there), the 2% rebate returns $600 — more than covering the membership fee. This is the loop that Costco has engineered: the more you buy, the better the membership pays for itself, which motivates you to buy more, which keeps the renewal rate at 92%.

Kirkland Signature: The $60 Billion Brand Nobody Talks About

In 1995, Costco launched a private-label brand named after its Kirkland, Washington headquarters. The brand was called Kirkland Signature. By 2024, Kirkland Signature accounted for an estimated $60 to $70 billion in annual sales — which, if it were a standalone company, would make it a Fortune 50 business by revenue, larger than Goldman Sachs, Pfizer, or General Motors.

The Kirkland strategy is deceptively simple: contract the same manufacturers who make the name brands to produce Kirkland versions at Costco's specifications, then sell them at 20 to 30 percent less than the branded equivalent. Costco's Kirkland batteries are manufactured by Duracell. Its coffee is roasted by Starbucks. Its vodka was repeatedly rated ahead of Grey Goose in blind taste tests. Its golf balls were found in independent testing to match the performance of Titleist Pro V1s at half the price. Members know this. It is part of the mythology.

The Kirkland brand deepens member loyalty because it gives Costco control over quality — if a Kirkland product is ever found to be inferior, Costco pulls it immediately, regardless of the contractual cost. This credibility reinforces the core proposition: inside Costco, every product is good value. You don't need to comparison shop. You don't need to second-guess the quality. The membership fee is, in effect, a subscription to a curated world where someone has already done all the vetting for you.

The Treasure Hunt: Engineering Urgency in a Warehouse

Walk into a Costco and you will find roughly 4,000 SKUs — the industry term for distinct product types. Walk into a Walmart and you'll find 30,000 or more. Costco's deliberate limitation of its selection is not a constraint; it is a design choice that serves multiple functions. With fewer products, Costco can negotiate far better terms from suppliers, buy in enormous volume, and keep inventory moving fast. It can also staff its warehouses with people who actually know the products, rather than a floor army trained only in restocking.

But the deeper strategic function of Costco's limited SKU count is what the company calls the "treasure hunt." Alongside its core lineup of predictable staples — the toilet paper, the rotisserie chickens, the enormous containers of olive oil — Costco rotates a selection of limited-time, non-core items that create genuine urgency: a Tiffany jewelry case next to the car tires. A $300 cashmere sweater beside the 40-pound bag of dog food. A 65-inch television for $200 less than any competitor. These items are temporary. They appear, they sell out, and they don't come back. Members learn this. And so a trip to Costco is not a routine errand — it is a potential discovery. The treasure hunt keeps members coming back more often than the simple logic of buying in bulk would otherwise justify.

How Costco Treats Its Employees (and Why That's a Business Decision)

The conventional retail playbook treats labor as the first cost to cut. Costco rejected that playbook from the beginning. Costco pays its warehouse employees an average of $25 to $30 per hour — substantially above the retail sector average of $17 to $18. It offers comprehensive healthcare, 401(k) matching, and real promotion pathways. Jim Sinegal was famous for earning a modest salary by Fortune 500 CEO standards — roughly $350,000 annually when he ran the company — while the average Costco hourly worker earned wages that allowed a middle-class existence in most U.S. markets.

This is not altruism. It is industrial logic. High wages reduce turnover, and turnover in retail is enormously expensive — estimates range from 50% to 150% of annual salary per employee lost and replaced. Costco's employee retention rate is among the highest in its industry. Low turnover means Costco spends less on recruiting, training, and the productivity drag of inexperienced workers. It also means the employees who interact with members are knowledgeable, motivated, and stay long enough to become genuinely good at their jobs. The high-wage model doesn't eat the margin. Over time, it protects it.

7 Business Lessons from the Costco Blueprint

• Profit from the relationship, not the transaction. Costco's merchandise barely breaks even. The profit is in the membership — an ongoing relationship with a guaranteed annual payment. Any business that can shift from transaction-based revenue to relationship-based revenue gains pricing power, predictability, and loyalty that per-sale models cannot replicate.
• Constraints create focus. Limiting SKUs to 4,000 forced Costco to be extraordinarily selective about what it carries. That selectivity made every product better than average and every buying decision easier. Fewer, better choices — in products, in hires, in strategy — consistently outperform an overwhelming abundance of mediocre ones.
• Anchor on value, not margin. The $1.50 hot dog, the $4.99 rotisserie chicken, the $65 annual fee (unchanged for seven years): Costco uses anchors to communicate that it is unconditionally on the member's side. These loss leaders cost real money. They buy something worth far more: the belief that Costco will never rip you off.
• The dogmatic cap on markups is not a cost center — it is the brand. The 15% markup ceiling sounds like a restriction. It is actually Costco's most powerful competitive advantage. Suppliers know exactly what Costco will and will not do. Members know exactly what to expect. Certainty at scale builds trust that no advertising campaign can buy.
• High wages are a cost-reduction strategy. Costco's above-market pay reduces turnover, training costs, and service quality degradation. The companies that cut wages to protect margin often destroy the product in the process. Costco built its brand on the quality of the experience — and the experience is delivered by people.
• Create reasons to come back beyond necessity. The treasure hunt is not an accident. It converts a functional errand into an entertainment experience. Members come to Costco not just to buy toilet paper but to see what's new. Businesses that can create discovery — even in mundane categories — generate visit frequency that pure utility-seekers never achieve.
• Long-term thinking compounds. Jim Sinegal ran Costco for 28 years with virtually the same model he opened the first warehouse with. No pivot, no dramatic reinvention. Just relentless execution of a simple thesis: lowest prices, highest quality, treat employees well, make the membership worth it. The $400 billion market cap is the compound interest on that discipline.