The Brainy Business | Understanding the Psychology of Why People Buy | Behavioral Economics: 47. A Behavioral Economics Analysis of Costco

47. A Behavioral Economics Analysis of Costco

May 10, 2019

If you’ve been listening to the podcast for a while, you have likely heard me mention Costco before. They do so many things differently than traditional business might suggest is best or profitable, but they have found a way to make it work and their business thrives because of it. In this episode, I’m going to discuss how Costco rivals almost any store or brand, and how they don’t do traditional marketing and advertising.

I’ll talk about how they invest back into the community, have a simple code of ethics, reward shareholders, and how having a membership model and plan can work if it’s done right. Costco is the perfect brand for a behavioral economics analysis, because they do things differently, but in a smart, strategic way that makes their unconventional plan a huge success. Today, we learn why Costco is the powerhouse that it is (and what you can implement in your own business - even if your model is completely different).

Show Notes:

[04:19] Many consider Costco’s biggest rivals to be Walmart / Sam’s Club or Target – but depending on the section of the store…they pretty much compete with everyone: from Amazon, Home Depot and Best Buy to Expedia, Pizza Hut, Les Schwab and your local optometrist.
[04:54] They participate in the community and reinvest in the company in a way that creates advocates, which reduces the need for traditional marketing.
[05:32] That gets me to the core of Costco – their mission. It seems basic and generic enough, “to continually provide members with quality goods and services at the lowest possible prices.”
[06:06] But they differentiate with their Simple Code Of Ethics: Obey the law. Take care of our members. Take care of our employees. Respect our suppliers. And then, reward shareholders.
[06:57] The Costco membership model.
[08:01] A membership is good for the store because it encourages people to shop there to “get their money’s worth” – this is loss aversion in action. And, this is not just triggered by perceived ownership…you actually have some real ownership because you have paid to be part of the in-crowd.
[09:29] Costco has put a lot of work into making it a lifestyle choice.
[10:22] Having time to slow down and experience with all the senses puts perceived ownership into overdrive.
[10:54] This aversion to losses combines with the scarcity factor to encourage people to buy more. I’m sure items are scarce at Costco to encourage sales, but there is more to it than that. The high turnover of product and high efficiency model of Costco increases their profit margin and allows the whole model to really work.
[11:31] They also have a very generous return policy.
[13:22] The Costco food court is one of predictable beauty, which as you know is a perfect recipe for building habits.
[15:28] And, of course, this increase in sales is made possible by one form of marketing Costco does believe in – free samples. Again, this is loss aversion and reciprocity at work.
[17:12] If the item is an exclusive Kirkland Signature item, you know the exact thing isn’t available in other stores. All Kirkland Signature products are carefully researched, tested, hand selected, or custom-created by Costco. They truly live their mission through the whole Kirkland Signature experience – of doing best by their members, employees and suppliers.
[20:02] One reason samples increase sales at Costco is because there are not too many choices.
[21:28] Happy employees means lower turnover, which reduces expenses. Happy employees also means a better experience for shoppers, which keeps them happy and coming back. And, knowing that you shop at a place that values their employees also makes shoppers feel good.
[22:34] Costco also does a lot of work to support their local communities, with a focus on children, education, as well as health and human services for grants and donations.
[24:00] Costco works with partners and uses the value of bulk buying with their suppliers.
[25:09] It is about knowing profits matter, but they aren’t everything. Squeezing out an extra 50 cents on hot dogs or rotisserie chickens – or allowing for a 16% margin on some products would make a huge impact on shareholder pockets, but it isn’t worth the negative it would cost to the members, who come first.
[27:04] No company’s set up is something any other business can copy and paste.
[27:29] Costco knows who they are and what their brand is there to do, and every decision they make is so easy because they can tie it back to the mission and code.
[29:16] Is being a member of benefit that would work well in your business? Think about the value.
[30:43] What do you stand for? Make it clear to yourself, employees, customers, and more.
[32:04] Do you make it easy for people to buy from you? Are you encouraging them to get items or is it difficult? Can they get a test or sample?
[33:42] Money back guarantees are worth it.
[34:00] Should you incorporate a loss leader that benefits people and draws them in?
[35:09] Think about the full experience. What can you be doing?
[36:33] Everything matters, and it's always important to try things.

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