Gain insight into Costco's cost structure, revenue streams, customer segmentation, key partners and activities by analyzing Costco's business model canvas.
If you find visiting and shopping at retail stores interesting, you've come to the right place. Today, we will be discussing one of the world's largest big-box retailers.
There are countless retailers in the world. However, only a few big-box retailers exist. Visiting a gigantic big-box retail store is really fun, I am sure you guys can relate to it. If you live in the US, you might have seen many big-box retailers such as Walmart and Ikea.
Like these gigantic marts, Costco is one of the biggest big-box retailers in the world. If you live in the US, it is nearly impossible that you haven't been there at least once. Costco is widespread in the US.
Would you believe it if I were to tell you that Costco is spread at 581 locations in 48 states of the US? As shocking as it may sound, that's true. However, It doesn't end there. Costco also operates worldwide, and it has established 828 retail stores across the globe.
Looking at the exponential growth of Costco, people are intrigued to find what's so unique about Costco's business model.
A business model holds great significance in determining whether a business will succeed or end up as a failure. This is because it identifies the fundamentals of a business. Following these fundamentals, a business will operate in the future.
Moreover, planning to start a business may seem easy at first. However, identifying revenue, expenses, targeted audience, and other components of a business model gives businesses a reality check on whether the business plan can be implemented or not.
Businesses need to choose and then develop a good and accurate business model to attain success in the future.
Costco was established in 1983. Currently, it is operating all across the globe and has even become a multinational wholesale retailer. Costco is the fourth largest retailer in the world.
Costco is heaven for people who want to buy wholesale since it offers discounts on wholesale buying. Moreover, Costco has also launched its brand named Kirkland signature. Under this brand name, Costco offers regular house usage products.
However, one of the most exciting things about Costco is its membership. Till now, 116.6 million people hold Costco's membership cards. You can imagine its customer base by looking at such a high number of people with Costco's membership.
Costco is a significant source of employment in the countries where it operates. However, alone in the US, it employs 195,000 people out of 298,000 worldwide.
Looking at how Costco had a humble beginning to the point where it generated revenue of $195.9 billion and became one of the world's biggest retailers, let's see what type of business model Costco follows.
Business Model Followed by Costco
Different business models exist, and every business adopts a most convenient model after analyzing key factors such as the target audience and the business strategy.
Business models can be divided into two categories, traditional and modern business models. Traditional business models are adopted based on what type of business you possess. For example, If a business manufactures products, it'll adopt the manufacturing business model.
Similarly, suppose the business type is franchising or brick-and-mortar, or a business is in distribution or retail. In that case, businesses will adopt a business model according to their business type.
However, modern business models are adopted by businesses according to their business strategy. Therefore, all the modern business models, for example, freemium, subscription, bundles, affiliate, or razor blade, are adopted by businesses if they go hand in hand with their business strategy.
Costco has adopted a membership-only warehouse club model or a simple subscription-based business model. According to this model, customers have to pay a subscription fee after a certain period to avail of services or products the business provides.
Similarly, people must pay $60 annually to get Costco's membership, after which they can shop at Costco. Moreover, other incentives are also offered to members. Again, this is an easy business model. All you have to do is ensure no one is consuming your products or services without subscribing.
Now we have discussed the business model adopted by Costco. Let's proceed further to analyze Costco's business model canvas in detail.
Costco's Business Model Canvas
In this section, we will discuss Costco's business model canvas. But before that, let me tell you what a business canvas is. A business model is visualized with the help of a business model canvas.
Since business models discuss different business components, it gets confusing for readers to understand business models completely. Hence, the business model canvas organizes and depicts business models more simply.
Key Partners of Costco
This business model segment features a business's key partners, including its suppliers and customers. Anyone who provides resources to run your business can be considered a partner.
Costco has several partners in place that help it to function smoothly. The main partners of Costco are its suppliers, who supply bulk quantities of goods without disruption. Besides the suppliers, Costco is also in a credit partnership with Visa, which facilitates its customers.
Lastly, like any other business, Costco relies heavily on its customers and tries to facilitate them as much as possible since its revenue depends on its customers. Of course, this makes Costco's customers its partners too.
Key Activities of Costco
You must identify your business activities to create a profitable business model. The primary purpose of this section is to show how each activity will benefit your customers, build brand loyalty, optimize revenue and profitability.
Costco not only operates in the US but has also spread its operations worldwide. Collectively, it operates in eight countries. Besides that, it has also launched its subsidiaries in Korea and Taiwan.
Moreover, as we know that Costco was initially established as a wholesale retailer. However, now it has also launched its brand and markets its own products. This has helped Costco a lot in increasing its revenue.
Besides that, Costco has also increased its consumer base by operating online and entering different businesses such as business delivery, photo processing, membership services, and pharmacy.
Key Resources of Costco
Every business requires some resources to function. A business's major resources are land, labor, capital, and entrepreneurship. Let's have a look at Costco's resources.
When we talk about land, Costco has acquired a lot of land. As we discussed, Costco has 828 retail stores across the globe. Moving the labor, Costco has a large workforce that ensures daily operations are carried out smoothly. It has employed 298,000 people worldwide.
Besides that, a significant amount of capital is accumulated. Since Costco's operations are linked with goods, they also possess many vehicles that make the transportation of goods possible. Moreover, its IT infrastructure and online store add to its capital too.
Now moving to entrepreneurship, looking at the journey of Costco and its current position in the market, we can easily conclude that Costco possesses strong entrepreneurship skills that help the country to drive forward.
Value Proposition of Costco
This section of the business model holds great significance for the customers since it helps them decide why to consume products or services offered by this business. A value proposition tells customers what a business has to offer.
Costco, one of the world's biggest retailers, has sorted out this section very well. Let's look at some of the things it has to offer to its customers.
Low Prices
A thing that attracts customers more than anything is low prices. Costco, a wholesale retailer, provides products to its customers at a relatively low price compared to any grocery store or supermarket.
Customer Friendly Policies
Customers tend to buy from those retailers who treat their customers well and accommodate them the most. Keeping this in mind, Costco has made customer-friendly policies that allow customers to return most of the products and get a refund.
Moreover, it allows its members to cancel their membership anytime and get a 100 percent refund.
Membership Perks
One way of attracting customers is to provide them with perks and privileges. Costco understands this principle and offers gifts to its members annually.
Accessibility
Costco ensures it's always present for its customers, which is why it operates at 828 locations. Moreover, it provides the option of online shopping and delivery to facilitate its customers.
Customer Relationships of Costco
In business, you often think of your customer as your family. However, businesses and customers share a very unique bond. Loyal customers look at their favorite brand as their friend and expect to receive the same love in return.
Businesses must live up to the expectations of their customers by accommodating them with personal assistance and after-sale service in return.
Businesses have different ways to stay connected with their customers. However, Costco tries to build a relationship with its customers by being physically present around them. This is why it keeps opening its stores worldwide.
Moreover, it provides online shopping services which help those who can't shop physically. This way, customers who can't be physically present are also connected with Costco.
Costco also tries to keep its customers happy by providing quality service at its retail stores. In addition, Costco's staff ensures that the customers are handled in the best way possible.
Moreover, Costco's sales support also facilitates the customers by solving their queries by phone and email in the least possible time. Moreover, Costco's social media team keeps on interacting with its customers directly on social media to maintain a healthy relationship.
Customer Segmentation of Costco
Businesses need to identify their targeted audience correctly to succeed. In this section, we will discuss Costco's targeted audience.
Since Costco is a wholesale retailer, it has divided its market into two categories. One represents the regular customers who buy products for their household. These customers are individuals who are attracted by low prices.
However, the other category is small and medium-sized businesses that buy products from Costco in bulk and then sell them to customers at a higher price.
Distribution Channels of Costco
No matter how good a product a business is offering, if it doesn't develop the right distribution channel, the business won't be able to grow. The distribution channel refers to the way products or services reach customers. This section will discuss what distribution channel Costco has adopted for its products.
Costco has a very simple distribution channel. Looking at what products it offers, it mainly uses its retail stores to sell the products. However, it also uses the internet to deliver its products to customers.
Cost Structure of Costco
A business can never experience success if it doesn't have a properly well-defined cost structure. This section of the business model helps businesses identify all the significant sources of expense so that they can easily estimate their costs and make a better decision about how to act.
The main expenses incurred by Costco are due to its international operations, which include buying land and paying salaries to the staff. Moreover, other expenses include buying merchandise, IT infrastructure, and transportation costs.
Other than that, Costco also spends money on acquiring small businesses. For example, recently, it acquired a firm for $1 billion.
Revenue Streams of Costco
The primary purpose of a business is to generate revenue. This section highlights all the sources through which a business generates revenue.
Costco has a simple revenue stream as it mainly relies on two things for revenue. First, since Costco is a retailing business, it generates revenue by selling products manufactured by other brands and its own brand. Besides that, a thick portion of Costco's revenue is generated through its membership fee.
In 2021, Costco generated revenue of $195.9 billion. However, $3.88 billion out of the total revenue was generated through membership fees.
Costco's Business Model: Final Word
Today's article shed light on the business model of the world's fourth largest retailer, Costco. Costco holds great significance in the retail world. It is one of the largest big-box retailers having operations across the globe.
However, to achieve similar success to Costco, one must have a business model like Costco too. A business model holds great significance in determining the future of a business.
In this article, we discussed Costco's business plan, which led it to achieve such heights in the retail industry. After that, we gave you an insight into Costco's business model by discussing all components of Costco's business model in detail.
After reading this article, we hope you'll recognize the importance of a good business model in the success of a business. Since you have already read about Costco's business model, if you want to know about the internal and external factors that affect Costco's operations, have a look at Costco's SWOT and PESTLE analysis.
