Table of contents:
- Costco’s business model
- Costco’s target market
- How Costco can increase its ecommerce sales
- Conclusion
Costco has been a mainstay of American culture for decades. You can find a 5 lb bucket of mac and cheese, $400,000 dollar engagement ring,4-foot wine glass, a variety of world’s finest wines and other unique items, all under one roof.
But you know what else you can find at Costco? A hot dog and cold pop combo for a buck fifty, plus free refills.This is what appeals to consumers everywhere, its finding quality products at great prices. (whiskeyriff.com)
Costco online sales increased at the highest rate in the last five years during its fiscal 2020 due to the increase in online shopping during the pandemic.
In the last 12 months ended Aug. 30 Costco’s online sales increased 49.5%. Ecommerce sales accelerated 90.6% during its Q4, even faster than the 64.5% year-over-year growth in fiscal Q3 ended May 10. Now, the focus of Costco is on ‘low-hanging fruit’ ecommerce strategies.
Costco's Business Model
Costco’s business model is built on customer memberships, who join and renew annually.
Costco Wholesale Corporation, also known as Costco is a membership warehouse club that offers a huge selection of products, with exclusive member services. With hundreds of locations worldwide, Costco was in 14th position on the Fortune 500 rankings of the largest United States corporations by total revenue in 2019.
Costco is considered one of the leading physical retailers in the United States. You can shop at Costco only if you are a member. Costco’s business model is to generate high sales volumes and rapid inventory turnover by offering members great prices on a unique vetted selection of high quality branded and selected private label products in a wide range of merchandise.Â
It sells products in bulk quantities at discounted prices, offers a smaller selection of high-quality products, and focuses on private label brands. Costco provides a “treasure hunt” shopping experience, prioritizes customer satisfaction, and maintains an efficient supply chain and distribution network. The company also prioritizes employee welfare by providing competitive wages, healthcare benefits, and career advancement opportunities.
Some of the major factors responsible for Costco’s high membership retention rates of more than 90% include:
- High quality productsÂ
- Lower prices
- Excellent customer service
- Generous return policy
- Volume discounts
- Leading brandsÂ
- Discounted private label products
- Unique luxury goods
- Bulk household and commercial products
Costco’s Target Market
The strategy of Costco has been to target affluent customers as members who want high quality products while saving money. It also explains why the vast majority of the nearly 800 Costco stores are located in affluent suburban areas both in the U.S. and around the world. Most Costco shoppers are suburban homeowners. It takes a lot of space to store bulk purchases.
- Affluent customers usually shop in bulk and make bigger purchases
- Costco’s loyal customers are offered co-branded cashback credit cards
- Customers get many benefits in addition to getting quality products at wholesale prices
A key attraction for members is the private label Costco Kirkland signature brand which offers high-quality products that earn higher margins compared to the other products that the company sells. This is how Costco functions profitably by attaining higher sales volume and quick inventory turnover despite having a lesser gross margin in comparison to the other retailers. This strategy of focusing on attracting and retaining affluent customers has worked for Costco and its growth rate remains impressive.
A culture of customer service, collaboration, and ethics can help Costco to maintain a strong reputation in the market. The company saves on its operating expenses by not investing in marketing and promotions, unlike the other retail companies. The consistent focus of the company on quality and customer service has enabled it to maintain a strong brand image and reputation with its customers for decades.
How Costco Can Increase Its Ecommerce Sales
Improve Omnichannel Customer Experience
Consumers use variety of ways to research and buy products online from a mobile phone to a desktop or a tablet. Customers nowadays expect a seamless omnichannel experience that allows them to shop instantly anytime and anywhere.
- Modernize IT systems for seamless customer experience on any touch point or device
- Customers access services, make purchases and interact with companies through various channels and adopting an Omnichannel approach will help Costco to provide a cohesive user experience that will be seamless, steady, and efficient for the customers
Invest In New Technologies
Technology drives a competitive advantage in the retail industry. Retail brands achieve efficiency and speed by investing in digitalization and cloud technologies.
- Costco needs to enhance the level of customer convenience and customer satisfaction by investing in technology.
- The brand can do a lot to make its ecommerce capabilities stronger by investing in digitalization.
- Amazon Prime offers many benefits to its members including the same day shipping for members that qualify for free same-day delivery. Costco can adopt similar strategies by investing more in technology.
Consumer behavior has changed a lot due to the COVID-19 Pandemic. IT has increased the dependence of people on technology to fulfill their needs like shopping and entertainment. Retail businesses like Costco need to focus on technology to improve consumer convenience and attract consumers.
Improve User Interface (UI) & User Experience (UX)
The Costco.com ecommerce website must ensure the user interface(UI) and user experience (UX) are optimized for all devices and user friendly to ensure it’s customers can easily find and buy products they are looking to buy.
Some of the top features of a user friendly e-commerce website include:
- Optimized navigation and search options: Consumers can navigate and find the products they are looking for easily
- Product categories are streamlined and optimized to help customers easily browse the website
- Easy drop-down menu: It should provide an overview of each section of the menu which will help users locate what they want while having good knowledge about it.
- User-generated reviews: 3rd party reviews establish trust and confidence for the products displayed
- Fast loading website: Fast pagespeed is one of the key factors for high converting e-commerce websites
Spend More On Online Advertising
- Advertising can help Costco to serve targeted ads to their audience who have already visited or taken action on their website.
- Convert abandon carts on Costco.com by marketing to customers who didn’t complete the purchase
- Costco also needs to have a robust advertising strategy to promote its products to shoppers online.
- Advertise on Google shopping to promote its products online to non-members
- Increase targeted email marketing to frequent shoppers
Increase Selection & Variety of Products
The selection and variety of products at Costco are limited online. Unlike Amazon, Costco does not have a vast selection of products or many choices for the customers to choose from.
Coupons And Promotions
Costco does not offer exclusive coupons to customers shopping online. Coupons will help Costco promote their products and boost sales. Offering discounts to attract customers will also increase the visibility of products offered by Costco.
Personalization
Unlike Amazon, Costco does not offer related products, add-ons, or bundles to its customers online which lowers overall online sales
Third Party Sellers
Unlike Amazon, Costco does not have a third-party marketplace where other vendors can sell products
Conclusion:
Costco has a significant opportunity to boost their online revenues by focusing on enhancing the user experience, leveraging personalization and recommendations, optimizing for mobile, integrating loyalty programs, and implementing strategic marketing and promotions. By adopting these strategies, Costco can stay competitive in the rapidly growing e-commerce market and achieve substantial growth in their online sales.
Deepak Wadhwani has over 20 years experience in software/wireless technologies. He has worked with Fortune 500 companies including Intuit, ESRI, Qualcomm, Sprint, Verizon, Vodafone, Nortel, Microsoft and Oracle in over 60 countries. Deepak has worked on Internet marketing projects in San Diego, Los Angeles, Orange Country, Denver, Nashville, Kansas City, New York, San Francisco and Huntsville. Deepak has been a founder of technology Startups for one of the first Cityguides, yellow pages online and web based enterprise solutions. He is an internet marketing and technology expert & co-founder for a San Diego Internet marketing company.
