The story
Costco runs one of the most counter-intuitive business models in retail: it deliberately makes almost no profit on the things it sells. Markups are capped low by policy, prices are as close to cost as the company can manage, and the actual profit comes from the annual membership fee customers pay for the privilege of shopping there. It is a model that aligns the company perfectly with its members — Costco's incentive is to give you the best possible deal, because your renewal, not your purchase, is what it earns from.
Founded in 1983 by Jim Sinegal and Jeff Brotman and later merged with Price Club, Costco built a cult-like loyalty on a simple promise kept obsessively: a tightly edited selection of high-quality goods at prices no one can beat, in a no-frills warehouse. Sinegal set a culture of paying workers well and treating suppliers and members fairly that his successors — Craig Jelinek, and from 2024 Ron Vachris, who started as a forklift driver — have guarded closely.
How it makes money
Membership fees. Costco sells goods at razor-thin margins — often barely above what it pays — so that the retail operation roughly washes its face, and the annual fees members pay drop almost straight to profit. This flips the usual retail incentive: instead of trying to extract more per item, Costco tries to give members so much value that they renew. A limited selection concentrates its buying power into huge volumes of few products, driving costs — and prices — down further.
We're going to give the customer the best possible value.Jim Sinegal
The moat
Costco's moat is a virtuous loop that its low-margin model makes almost impossible to copy. Low prices drive high membership and volume; huge volume on a narrow range gives enormous buying power; that power drives prices lower still, deepening loyalty and renewals. A conventional retailer can't simply match Costco's prices without also giving up the retail margin it depends on to survive — and Costco's rock-bottom cost structure and member-funded profit mean it can hold prices no margin-dependent rival can. Add the switching cost of an already-paid annual fee and the loyalty compounds.
Key people
Jim Sinegal
Co-founder & longtime CEO; culture architect
Jeff Brotman
Co-founder & chairman
Craig Jelinek
CEO 2012–2024
Ron Vachris
CEO from 2024; started as a forklift driver
The playbook
Key decisions & principles
Align your profit with the customer's interest
Earning from membership, not markup, means Costco profits only by serving members well. Structure your economics so that what's good for the customer is what pays you.
Constrain selection to gain power
Stocking a few thousand items, not tens of thousands, concentrates buying power and cuts cost. Less choice, done well, can beat more choice.
Turn the fee into a moat
A paid annual membership is both profit and a switching cost — members shop more to justify it and renew to protect it. Recurring commitment breeds loyalty.
Protect the culture that protects the margin
Costco pays workers well and guards supplier and member trust, sustaining the low-cost, high-loyalty engine. The model only holds if the culture does.
What to read next
- The Costco Story — (company history)
- The Everything Store — Brad Stone
- Sam Walton: Made in America — Sam Walton
Why this matters
The strategy behind this business connects to models and moats you can study:
Frequently asked questions
How does Costco make money if prices are so low?
From annual membership fees. Goods are sold at near cost so the retail operation roughly breaks even, and the fees members pay to shop there become the bulk of the profit.
Why can't competitors just match Costco's prices?
Because a margin-dependent retailer can't sell at near cost and survive. Costco's profit comes from fees, not markup, and its narrow, high-volume range gives buying power rivals can't match.
Who runs Costco?
Ron Vachris became CEO in 2024, succeeding Craig Jelinek. Vachris began his Costco career as a forklift driver.