Consumer Behavior and Pricing Strategy at Costco: Analytical Essay

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Introduction:

Costco Wholesale Corporation is the largest membership warehouse club in the United States. Today, the firm has more than six hundred numbers of warehouses, with more than twenty areas of operations around the world, including the more than four hundred warehouses in the United States, and there were more than 70 million cardholders and the annual revenue reached at $105.2 billion (Costco Wholesale Corporation, 2014).

Costco is open only to members with either of these types of membership: Business, Gold Star (individual), and Executive membership which could lead to the purchase of product offerings and various consumer services such as auto and homeowner insurance, auto buying, mortgage, refinancing, boat and RV loans, identity protection, personal check printing, and business services at discounted price offers (Costco Wholesale Corporation, 2014).

Therefore, Costco enjoys the opportunity to generate higher margins, lower marketing costs and low over-head of private-label products (Peter and Olson, 2007). In other words, it is clear that the success of this firm lies in its ability to achieve a large scale leading to its competitive advantage and a high value for customers. For this reason, Costco must eventually have a substantial idea of consumer behavior as integrated into its marketing strategy. This is the most crucial idea that the work at hand, emphasizes, but prior to seeing the big picture about it, it is also important to learn the other significant things about Costco.

History:

Costco was originally operated under the name of Price Club in 1976. The firm is founded by James Sinegal and Jeffrey H. Brotman. In 1983, the first Costco warehouse was instituted in Seattle Washington. In 1993, Costco merged with Price Club, calling it PriceCostco, while dominantly employing the business model and size of Price Club, which generated billion dollar sales every year. However, Robert Price, the founder of Price club left PriceCostco and started Price Enterprises in 1994. This left Costco alone and led it to rebrand the firm as Costco Wholesale in 1997 including all those Price Club locations it had already established.

Costco is the second largest retailer in the US and the fifth largest retailer in the world (Said, 2013). Today, Costco is known for its ability to provide high value for customers, especially when it comes to its highly affordable and varied product offerings.

The company carries a “broad line of product categories including groceries, appliances, television and media, automotive supplies, toys, hardware, sporting goods, jewelry, cameras, books, housewares, apparel, health and beauty aids, tobacco, furniture, office supplies, and office equipment” (Sander & Bobo, 2011). Perhaps, one will call Costco a one-stop shop, with high affordability, enough to help the small to medium-sized businesses save on their purchases for them to be able to resell. However, Costco’s leading sales came from individual consumer, the firm’s ultimate growth driver (Sander & Bobo, 2011).

About the organization:

There are many things to understand about Costco, which primarily include its values, mission, vision and objective. However, aside from this, ideas concerning its current related-marketing moves, and SWOT and stakeholders analysis are also vital considerations in understanding this firm.

Values, mission, vision and objective:

Costco’s ability to acquire profits and offer prices is in line with ethics, which can be depicted in the following mission statement.

“Costco’s mission is to continually provide our members with quality goods and services at the lowest possible prices. In order to achieve our mission, we will conduct our business with the following Code of Ethics in mind: obey the law, take care of our members, take care of our employees and respect our vendors. If we do these four things throughout our organization, then we will realize our ultimate goal, which is to reward our shareholders – Costco Mission and Code of Ethics” (Farfan, 2014).

Costco saw the opportunity that when they keep costs down, they can pass the savings on to their members and when membership base is large enough leading to tremendous buying power, the result will be efficiency for the firm and the best possible prices for their customers (Costco Wholesale, 2014).

It is clear in the mission statement on Costco that the firm values how the idea of becoming responsible of the society, primarily to their stakeholders and how it would conduct itself before them. Costco is after of implementing rules and obeying them, while continuing provision of the kind of respect that their stakeholders deserve.

On the other hand, Costco’s mission elaborates how it is important for them to continuously provide high quality of goods and services even at a lower cost. Employing this leads Costco to obtain their goal of successfully rewarding their customers. In other words, Costco’s mission is integrated with its ultimate goal of enticing the actual need of their customers.

Current marketing:

According to Costco’s website, one can be a Gold Star Member, Business Member, or an Executive Member. Business membership and Gold Star membership both cost $55 while Executive membership costs $110. Costco wholesale mainly targeting and focusing more heavily on individual consumers who are willing to pay more for higher end quality products.

Costco entry is associated with higher grocery prices at incumbent retailers, and that effect is strongest in cities with small populations and high grocery store densities. This is consistent with the retailers competing with Costco along non-price dimensions such as product quality or the quality of the shopping experience. In addition, Costco has much power in cities with low populations and a large number of grocery stores per capita.

Price is assumed to be the most pivotal element in order for the exchange process to be initiated (Peter & Olson, 2007). Therefore, this leads to the idea that the actual pricing strategy is relevant to the link existing among price affect and cognition, price environment and price behavior. The actual current marketing of Costco without question is linked to the importance of pricing strategy.

Good quality merchandise at low prices is what Costco would want to offer to its customers in order to provide them the value and reward that they deserve. In order to make this happened, Costco ensures to acquire more members to widen its scale. When this scale is widened, as a wholesaler, Costco will also generate remarkable savings on costs from its prospective suppliers. This potential savings on costs, as stated in Costco’s vision and mission, will be rewarded to the members, allowing them to enjoy low prices on branded and high quality product offerings. The business model associated with Costco’s current marketing is simple, but since it is the first to initiate this in the industry, the firm remains to be the largest membership retailer in the US, which is due to its ability to acquire higher margins, lower marketing costs and low over-head of private-label products.

SWOT analysis:

Costco has many strengths, of which the strongest is their robust membership retention at 86%, with over 67 million cardholders worldwide. They have seen unyielding revenue and membership growth from year-to-year along with lower pricing than that of their competitors. Costco also has the lowest employee turnover rates in the industry, employees receive some of the highest paychecks and best medical insurance (Shields, A. 2012). Happy employees equate to a better and healthier environment for customers.

When it comes to weaknesses, Costco’s major issue is their lack of substantial warehouses to meet customer demand. This weakness forces many customers take a full day out of their busy lives to make the trip to Costco. The company has a relatively low urban presence, which produces this phenomenon. Furthermore, with little to no advertisements or promotional events the company does not promote themselves well to new or potential customers.

There are numerous opportunities Costco’s can look forward to. Costco’s low presence in evidently potential warehouse locations can lead to abundant opportunities for future growth. The company’s success in worldwide expansion will likely continue in future efforts. Moreover, the addition of an online membership option at a reduced price might greatly increase the company’s membership, while also helping to curb Amazon as a major threat.

Costco’s threats are retailers that provide on price and customer experience in the same as Costco. Indirectly Wal-Mart is Costco’s biggest threat, since they own Sam’s Club, which is a direct warehouse competitor. In fact, Apple products will soon be stocking the shelves at Sam’s Club, which could change the game for Costco (Shields, A. 2012). Amazon along with other online such sales organizations are threats to Costco as well. Although becoming a national supermarket is a lot of work it is still possible, so Costco must keep an eye out for threats from new organizations entering the field as well.

The 4 P’s of Costco:

In most price comparisons Costco is on the top for overall lowest price, they do this by “buying in huge quantity and never marking up any product more than 15 percent” (Logan & Beyman. 2013). Recently channel 5’s WPTV West Palm Beach decided to do a price comparison between Costco and its closest threat Sams Club; “The grand total was $262.05 for Costco; $274.31 cents for Sam’s Club” (Munro & Jackson, 2014). Costco does their best to keep the price low for their customers.

The promotions Costco endorses to its Costco club members are enumerable and enticing, but lacking when it comes to non-members of the club. Costco is “a store that never advertises, has no signs in its aisles, doesn’t bag what you purchase, and charges you a fee just to walk in the door” (Logan & Beyman, 2013). They have incredible weekly coupons and discounts on food, vitamins, jewelry, and travel among many other products and services.

The number of products carried by Costco is surprisingly small, most would be surprised to find that such a large warehouse has only about 4,000 SKU’s on their selves. In comparison to an average of 15,000 to 60,000 at most other supermarkets, Costco’s 4,000 is quite a low number. Another interesting aspect of Costco’s warehouse method is that almost all products stocked on their shelves can only be purchased in bulk.

Costco’s location placement is found in thickly settled areas with a specific demographic variation. Costco keeps its warehouse numbers low so there are only approximately 460 locations in the United States. Costco is the “largest warehouse chain in the world, with more than 600 locations and $93 billion in annual revenue” (Logan & Beyman, 2013). Costco’s worldwide locations include Mexico, Japan, United Kingdom, South Korea, Puerto Rico, Taiwan, Australia and Spain.

Stakeholder analysis:

Originally, Costco was open for small to medium enterprises because of its wholesale. However, individual customer is later part of its stakeholders. For this reason it would be safer to include the members, vendors and employees as Costco’s ultimate stakeholders. Below are the general stakeholders of Costco and their individual impact on Costco’s business. It was found that each of these stakeholders has an impact on Costco’s finance, organization, legislation and business as usual.

Impact on

Stakeholder group

Finance (gain/loss)

Organization

Legislation (planning)

Business as usual

Small to medium enterprises

√

Individual/loyal customers/members

√

Retailers

√

Government

√

Employees

√

Generally, the stakeholder groups can be categorized further as internal stakeholders and external stakeholders.

The small to medium enterprises, customers and members, retailers and employees are the internal stakeholders because of their direct impact on the organization, giving them higher power of influence in the organization, higher legitimacy and even a higher opportunity to ignite or demand action from the company.

The government on the other hand is the external stakeholder because of its indirect influence on the company. However, the government has a strong influence to demand action from the company when it comes to legal matters and socio-political concerns. There are other potential stakeholders of Costco that will have substantial influence, especially in the socio-political context. This might include the society as a whole, and the other organizations that try to protect the welfare of consumers or the people.

Below is the summary of the above points.

Internal Stakeholders

External Stakeholders

Enterprises (high power, strong influence)

Government (strong influence – urgency, legitimacy)

Customers/members (high power, strong influence – legitimacy)

Society (strong influence – legitimacy)

Retailers (high power, strong influence)

Other organizations (strong influence – legitimacy)

Employees (high legitimacy, strong urgency)

Marketing ideas:

The very basic ideas that are observed in Costco’s actual marketing activity are in line with the consideration of consumer costs and business costs. The actual marketing exchange is assumed to take its place when there is an important consideration between the consumer costs and business costs (Peter & Olson, 2007). Peter and Olson argued that marketing exchange will usually be the product of the interaction between consumer costs and business costs.

In the case of Costco, and particularly in its mission and ultimate goal and values for the customers, providing the lowest price for quality and branded products seems to be a way of ensuring the highest value satisfaction for the target market. This is a relevant competitive advantage of Costco.

Costco is trying to ensure overall cost leadership in the process, allowing customers to be enticed by its product offerings. In theoretical consideration, overall cost leadership is a source of competitive advantage for an organization (Porter, 1980). However, what is clear in the case of Costco with its low-price offerings is the consideration of value. A logical consumer based on the idea of Peter and Olson will find for a higher value, and a logical company will find for a higher profit. Costco, because of its scale will still ensure a higher profit margin, because of its ability to cut costs in its value chain.

Costco, captures price-sensitive consumers who are willing to drive longer distances to obtain offers and discounts. In this case, it is possible if the prices staty to rise at Costco they will start losing shoppers who are more price-sensitive and serve shoppers who are less price-sensitive. According to Ellickson(2004, 2007), large grocery chains compete on the basis of quality and variety, which requires substantial fixed investments in retail services.

Conclusion:

The work at hand just presented the important details on how exactly the pricing strategy of Costco provides the potential value of the customers and the significant value this has added to the target market. As found, customers are after of finding the right value for their money, which is a relevant factor that could ignite the actual exchange. On the other hand, an organization providing product offerings is looking forward to realize a profit, but in the case of Costco, providing low-cost offerings was made possible because of the firm’s large scale leading to its ability to generate higher margins, lower marketing costs and low over-head of private-label products.

References

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Costco Wholesale (2014). Why Become a Member. Retrieved from http://www.costco.com/membership-information.html
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Munro, D., & Jackson, Q. 2014. Costco vs. Sam’s Club: Which has the best prices?. MPTV West Palm Beach. Retrieved from http://www.wptv.com/money/consumer/costco-vs-sams-club-which-has-the-best-prices
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