How Costco Builds a Subscription Model Without Subscribers

Lucas: If I asked you to name a subscription business, you'd probably say Netflix, Spotify, maybe Amazon Prime. But there's a company that quietly collects over four billion dollars a year in membership fees, and it doesn't call itself a subscription at all. Luna: Costco. Lucas: Exactly.

Costco's entire business model is built on the membership. In their most recent fiscal year, membership fees brought in about four point six billion dollars. That's roughly the same as their entire operating income. In other words, without the membership revenue, Costco would barely break even on selling the actual goods.

Luna: So the profit comes from the fee, not the products. That is a dramatic statement. Lucas: It is, and it's a design choice. Costco famously caps its gross margin on any item at fourteen percent.

Most retailers aim for thirty to fifty percent. But Costco uses those low margins to drive volume, which in turn makes the membership more valuable. The more you buy, the more your sixty-dollar fee feels like a steal. Luna: So the membership fee is the real product.

The shopping is just... the demonstration? Lucas: Right. And they have two tiers.

The basic Gold Star membership is sixty dollars a year. The Executive membership is a hundred and twenty, and it gives you two percent back on most purchases. The data shows that once people hit a certain spend threshold, they upgrade. And once they upgrade, they tend to consolidate more of their shopping at Costco because the two percent back is meaningful.

Luna: And the renewal rates are extraordinary. I think they're around ninety percent globally, and even higher in North America. Lucas: Ninety-two point five percent in the US and Canada, last reported. That's Netflix-level retention, without the content.

But here's the thing: Costco doesn't track monthly active users or churn in the way a software company would. They just count whether you renew once a year. It's a subscription model, but it's deliberately low-frequency. Luna: Low-frequency, high-stakes.

If you don't renew, you can't shop. That's a pretty powerful lock-in. Lucas: It creates a different kind of relationship. Amazon Prime is also a membership, but it's bundled with video, music, delivery perks.

Costco's membership buys you access to a store with cheap hot dogs and giant jars of mayonnaise. The value proposition is almost embarrassingly simple. Luna: And yet, people feel a real loyalty. There's almost a cult around Costco.

Lucas: I think it's because the model aligns incentives. Warehouse clubs make money when members shop a lot and renew. So they have no incentive to overcharge on any individual item. The famous example is the rotisserie chicken.

Costco sells it for four ninety-nine, and has for years, even when chicken prices went up. They have their own poultry plant now to keep that price stable. Luna: It's a loss leader, but not in the traditional sense. It's a membership retention tool.

Lucas: Exactly. Every cheap hot dog, every gas station with low prices, every sample station is just a signal: you're in a place that's on your side. And that feeling makes people willing to pay just to walk in the door. If these conversations have moved your work forward in some small way, you might appreciate that we keep this show free by design.

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Costco sells about ninety million of them a year. That's not just a loss leader. That's a supply chain flex. Luna: Yeah, that's a whole other level.

They own the vertical integration for that chicken. Lucas: They built their own poultry facility in Nebraska to control the supply. So the four ninety-nine price isn't a marketing stunt. It's a deliberate operational choice supported by scale.

And that's what makes the membership model work: you can't just copy the price. You'd have to copy the entire system. Luna: So the subscription is more than a billing mechanism. It's a strategic architecture.

Lucas: Right. And that brings us to the question of pricing. Costco raised its membership fee in 2017, from fifty-five to sixty dollars. Before that, it had been seven years since the last increase.

They're very cautious about it, because the fee is the profit center. If you raise it too much, you risk renewal rates. Luna: There's been speculation for a while that another increase is coming. The pattern has been roughly every five to six years.

We're at nine years now. Lucas: Analysts have been penciling it in for a while. But Costco's CFO said last year that they feel no urgency. They want to make sure the value gap is big enough that the increase feels fair.

That's classic subscription thinking: you don't raise price until you've added enough value that customers barely notice. Luna: But what about the competitive landscape? Walmart's Sam's Club also has a membership model. And Amazon Prime is arguably the biggest membership program in the world.

How does Costco stay differentiated? Lucas: Sam's Club is the direct competitor, and they've actually been innovating recently. They introduced Scan & Go, where you use your phone to scan items while shopping. Costco has been slower on technology.

But what Costco has that Sam's doesn't is a cachet. It's almost a cultural status symbol. You see Costco hauls on TikTok. People feel smart shopping there.

Luna: There's a status to getting a good deal. It's like signaling financial shrewdness. Lucas: Exactly. And that's hard for a competitor to replicate.

Now, Amazon Prime is a different beast. It's about convenience and ecosystem lock-in. But Amazon's retail margins are thin too. The difference is that Amazon has high-margin cloud and advertising to subsidize Prime.

Costco has only the membership fee. Luna: So Costco's model is actually purer. It's a subscription business that doesn't sell subscriptions. It sells access.

Lucas: And that purity has a cost. If you look at Costco's financials, the operating margin is about three percent. That's low for retail. But the return on invested capital is extremely high, because they don't need to spend much on marketing.

Members are the marketing. Luna: Word of mouth is free. And they have a very low cost of customer acquisition. Lucas: Right.

Most new members come from existing members inviting them. That's viral growth without a tech platform. And Costco pays its employees well, which reduces turnover and improves service. The whole model is designed for long-term stability, not quarterly spikes.

Luna: So the lesson for other businesses is: maybe the subscription isn't always a recurring billing page. It can be a membership that changes the entire incentive structure. Lucas: I think that's the biggest takeaway. Costco shows that a subscription model works when the fee creates alignment.

The company profits when the customer profits. That's rare in business. And it's why Costco has been able to grow for forty years without changing its core model. Luna: Forty years.

That's longer than most subscription software companies have existed. Lucas: And it's a reminder that the best business models are often the simplest. Charge a fee. Deliver value.

Keep your promises. Everything else is just execution.