How Costco makes money is less about high retail markups and more about scale, efficiency, and membership loyalty. Its low-price warehouse model attracts repeat shoppers, while recurring membership fees provide a dependable source of profit.

How Costco Makes Money in One Sentence

How Costco makes money is simple: Costco earns most of its revenue by selling products in large warehouse stores, while its recurring membership fees strengthen profitability and encourage customers to keep shopping within its ecosystem.

The company purchases merchandise in enormous quantities, keeps its product selection relatively limited, operates simple warehouse-style stores, and passes much of the resulting cost savings to members through lower prices.

Costco’s Two Main Revenue Sources

1. Merchandise Sales

Merchandise sales are central to how Costco makes money. Most of Costco’s revenue comes from selling groceries, appliances, electronics, furniture, clothing, fuel, pharmacy products, and many other goods. Its warehouses also serve small businesses that buy products for resale or daily operations.

According to Costco’s fiscal 2025 results, the company generated approximately $269.9 billion in net sales. Merchandise sales therefore provide the enormous scale behind the business.

However, retail products generally operate on relatively thin margins. Costco deliberately keeps markups low because affordable prices help attract members, build trust, and increase shopping frequency.

2. Membership Fees

Membership fees are another key part of how Costco makes money. Customers normally need a paid membership to shop at Costco. In the United States, Gold Star and Business memberships currently cost $65 per year, while Executive membership costs more and provides additional benefits.

Costco reported approximately $5.3 billion in membership-fee revenue during fiscal 2025. That amount was small compared with merchandise sales, but membership fees are strategically important because they are recurring and are not tied to the cost of individual products.

This creates a powerful cycle: membership fees support the business, low prices give customers a reason to renew, and renewals provide Costco with predictable recurring revenue.

Why Costco Keeps Its Prices Low

Low pricing is essential to understanding how Costco makes money. Many retailers try to maximize the profit earned from each product. Costco takes a different approach. It accepts lower merchandise margins to provide visible value to members.

This strategy works because members have already paid for access. Once inside the store, customers often purchase large quantities and make fewer price comparisons. Costco benefits from high sales volume, while customers feel they are recovering the cost of their membership through savings.

Low prices are therefore not simply a promotion. They are an essential part of Costco’s customer-retention strategy.

Limited Selection Creates Efficiency

A typical supermarket may offer many versions of the same type of product. Costco generally carries a smaller selection, focusing on products that can sell in high volumes.

This limited-selection strategy provides several advantages:

Costco can negotiate large orders with suppliers.
Inventory management becomes simpler.
Products move through warehouses more quickly.
Customers face fewer confusing choices.
Operating and handling costs remain lower.

Instead of trying to stock every available product, Costco tries to offer a carefully selected deal that members will consider valuable.

The Role of Kirkland Signature

Kirkland Signature is Costco’s private-label brand. It includes food, household products, clothing, health products, and many other categories.

Private-label products allow Costco to exercise greater control over price and quality. Kirkland Signature also gives customers products they cannot directly compare with identical items at competing retailers.

When customers trust the quality of Kirkland products, that trust strengthens loyalty to Costco itself.

The Treasure-Hunt Shopping Experience

Costco regularly changes some of its merchandise and offers limited-time products. Shoppers may enter the warehouse planning to buy groceries but discover electronics, furniture, seasonal products, or luxury items along the way.

This “treasure-hunt” experience encourages customers to explore the store and can increase unplanned purchases. The possibility that an attractive item may disappear creates urgency without requiring complicated advertising campaigns.

Simple Warehouses Reduce Costs

Costco stores are functional rather than luxurious. Products are often displayed on pallets or industrial shelving, and store decoration is limited.

This design helps reduce expenses related to product handling, display construction, and store maintenance. Costco can use those savings to preserve its low-price reputation.

The company also generates additional customer visits through services such as gasoline stations, pharmacies, optical departments, food courts, and tire centers.

Scale Strengthens Costco’s Advantage

Large purchasing volumes give Costco negotiating power with suppliers. In May 2026, Costco reported that it operated 931 warehouses worldwide, including 639 in the United States and Puerto Rico.

Its scale allows the company to buy enormous quantities, distribute costs across a large sales base, and invest in logistics and digital shopping capabilities.

Costco’s fiscal 2026 third-quarter results also showed continuing momentum: quarterly net sales reached approximately $69.2 billion, an increase of 11.6% from the comparable prior-year period.

Why the Model Is Difficult to Copy

A competitor can build a warehouse or launch a membership program, but copying Costco’s complete system is much harder.

The model depends on several connected strengths:

A trusted reputation for low prices.
Millions of paying members.
High purchasing volume.
Strong supplier relationships.
Efficient warehouse operations.
A successful private-label brand.
A culture focused on long-term customer value.

If a new competitor lacks scale, it may struggle to offer equally low prices. Without strong prices, customers may not see enough value to purchase or renew a membership.

Risks in Costco’s Business Model

Costco’s model is strong, but it is not risk-free. Important challenges include inflation, supply-chain disruption, tariffs, currency movements, rising labor costs, intense retail competition, and changes in consumer spending.

The company must also protect customer trust. If members stop believing that Costco consistently offers good value, membership renewals and shopping frequency could weaken.

Key Business Lessons from Costco

Costco demonstrates several useful business principles:

Recurring revenue improves stability. Membership fees provide income beyond individual transactions.
Customer trust can be a competitive advantage. Consistent value encourages long-term loyalty.
Operational simplicity reduces costs. Limited selection and warehouse displays improve efficiency.
Scale can strengthen bargaining power. Large orders help Costco negotiate favorable terms.
Lower margins can support a stronger system. Costco sacrifices some product margin to increase volume and membership value.

Final Takeaway

Costco makes money by combining massive merchandise sales with recurring membership fees. Its warehouses generate scale, while memberships encourage loyalty and help support profitability.

The company’s success is not based on one product. It comes from a connected system of low prices, efficient operations, limited selection, private-label products, high sales volume, and recurring customer relationships.

This article is for educational purposes only and does not constitute financial or investment advice.

Sources

Richalyze Editorial Team

The Richalyze Editorial Team researches and explains how companies, markets, and economies work through clear analysis, real-world case studies, and practical business insights. Our goal is to make complex business and finance topics easier to understand through accurate, well-sourced, and reader-friendly content.

How Costco Makes Money: Its Business Model Explained