A typical retailer tries to earn as much as it can on each product it sells. Costco does the opposite. It keeps a strict ceiling on how much it marks up goods.
That sounds like leaving money on the table. It is actually a different business model.
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The decision
Costco charges an annual membership fee and keeps product margins thin. A large share of its operating profit comes from those fees rather than from the goods on the shelves.
Why it worked
Low markups make prices hard to beat, which makes the membership feel worth renewing. High renewal makes the fee income predictable. Predictable income lets Costco keep prices low. Each part funds the next.
The limited product range helps too. Fewer items means more volume per item, which means better terms from suppliers.
Decide which line of the income statement you want to win on, and let the others serve it.
The transferable lesson
Look at where your profit actually comes from. If a recurring fee, a subscription or a service contract carries the business, it can be smarter to make the core product cheaper and use it to grow the recurring base.
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