How Costco Uses Consumer Behavior Successfully

How Costco Uses Consumer Behavior Successfully

December 2, 2014

How Costco Uses Consumer Behavior Successfully

Having worked in or around the human services field for most of my life the behavior of people has always been an interesting subject to me.  Behavior is how we respond to stimulation and is often driven by need.  From birth, we learn how to get our needs met through actions such as crying when we were hungry, needed changed, or wanted to be held.  As we get older and our needs become more complicated, so do our behaviors.  It used to be only in the professions of psychology and sociology that people would study human behavior.  However, in today’s world the understanding of why we behave the way we do has bled into many different professions including marketing.  With the increasing options a consumer has to choose from, it is important for a company to become better at identifying who the market is and what they need or want and then delivering it. One company that has done this well is Costco.  This paper will explore how Costco has utilized understanding consumer behavior to become a successful retail giant.

Costco is currently 19 on the Fortune 100 list and is a Fortune 100 staple largely in part to how it has mastered finding its target market.  Costco is often in the news for delivering high quality products at a good price and paying their employees better than most retailers.   According to an article by Boyle (2006), Costco had the second largest average of sales per square foot of retails space at $918.  Twice as much as the largest retailer in the country Wal-Mart which averaged just $438.  One of the founders of Costco, Jim Sinegal, has publicly disclosed that no product will ever have more than a 14% markup making volume of sales an important factor in its success.  In order to move a large volume, having the right products available for the consumer to purchase is essential.  The other important factor in Costco’s success is its membership fees.  Costco charges members a fee to be able to access its warehouse.  According to Costco’s 2013 annual report, Costco has an annual membership renewal rate of over 90%.  So how does Costco gain such strong customer loyalty?  

One way is to create strong customer loyalty as indicated by a 90% membership renewal rate.  According to a book written by Kotler and Keller (2012 pp. 54-57) customer loyalty is built on creating value for the customer in what is called customer perceived value.  Customer perceived value is the difference between what the customer sees as a benefit and what the customer sees as the costs.   Costco creates a unique environment in their warehouse that uses space and product placement to move their customers through the store.  They use a large amount of space to showcase seasonal wares and creates what co-founder Sinegal refers to as a treasure hunt.  Is this model successful?  Corona and Altamrino (2010 pp. 83-93), asked that question in a study they completed.  In the study they asked 150 people how important these seasonal items were by asking questions about the frequency of shopping trips, attitudes and perceptions of products and demographic data.  One of the questions even specifically asked about any discomfort they respondent may have felt if they were not able to find a seasonal product if they tried to buy it again.  The findings suggested that the seasonal nature of Costco’s offerings did not impact how often the person visited the store, but did impact how much they spent during the trip.  Respondents indicated that more often than not they bought more items than intended due to spontaneous purchasing of seasonal merchandise.  This would indicate that the treasure hunt model is effective and creates value for the customer.

Another way Costco creates value for the customer is through creating strong customer relationships.  In a study done by Chou (2010, pp. 189-209), Chou made the hypothesis that the customer experience was just as important as the products that they were buying.  Chou’s studied over 285 respondents and had them rate a company on five different types of experiential fields. His findings reinforced his hypotheses that a customer who had a good shopping experience had a better outlook on the products they purchased from the store.  In the book by Kotler and Keller (2012 pp. 61-62), it describes the importance of creating customer loyalty for a company in order to reduce the costs of what is referred to as customer churn.  Costco has created customer loyalty by creating strong customer relationships through positive experiences as indicated by the high membership renewal rate as previously indicated.  An example of this is by having excellent customer service.  This is achieved in two main ways.  One is by having a strong return policy that guarantees satisfaction for the purchaser.  Costco is considered to have an industry leading return policy making it less risky for the consumer to try new products.   Another is by having good employees.  Costco invests heavily in its employees by paying almost double the industry standard (Fisher, 2013) this promotes satisfied employees who in turn treat the customer well.  These two factors heavily weigh in the experience a customer has when shopping at Costco.