In 2023, Costco collected $4.58 billion in membership fees. Its net income that same year? $6.29 billion. Do the math: membership fees accounted for roughly 73% of the company’s total profit. That means almost everything Costco sells on the floor operates at near-zero margin by design. The warehouse shelves are not the business. The membership card is.

This is not an accident. It is the most deliberately engineered loyalty machine in retail history, and there are frameworks inside it that apply directly to entrepreneurs building any kind of recurring revenue model.

The Membership Fee Is the Product

Most retailers think of memberships as a loyalty perk layered on top of a retail business. Costco flipped that model entirely. For Costco, the membership fee is the core product. Everything else in the warehouse is just the mechanism that justifies the fee and gets people to renew.

As of fiscal year 2023, Costco had 128.7 million cardholders paying either $65 (Gold Star) or $130 (Executive) per year. That is predictable, pre-collected revenue that arrives before a single pallet of paper towels moves off a shelf. The renewal rate consistently sits above 92% in the US and Canada. That is not a loyalty statistic; that is annuity-level retention in a consumer business.

Former CEO Jim Sinegal, who co-founded the company with Jeff Brotman in 1983, was relentless about this philosophy. He understood that if the membership delivered obvious value, renewal was automatic. His job was to make sure the value gap between what members paid and what they got was always embarrassingly large. That meant keeping product margins so thin that competitors could not match prices without losing money.

The markup cap tells the whole story. Costco caps its gross margin on most items at 14%. On Kirkland Signature products, it is even tighter. For context, traditional grocery retailers operate at 25-35% gross margin, and specialty retailers push 50% and beyond. Costco is not trying to win on margin per transaction. It is winning on volume, trust, and the annual fee.

Treasure Hunt Psychology: Why You Always Leave With More Than You Planned

Walk into a Costco on any Saturday. You came for olive oil and paper towels. You leave with a cashmere sweater, a 72-pack of AA batteries, a rotisserie chicken, and a flat of sparkling water you did not know you needed. That is not accidental retail design. That is deliberate scarcity psychology called the treasure hunt model.

Costco carries roughly 3,700 to 4,000 SKUs at any given time. A typical Walmart Supercenter stocks over 142,000 items. Amazon carries hundreds of millions. Costco’s radical curation forces the company to choose only the highest-value items in each category, which trains members to trust that anything on the floor has already passed a quality filter. You are not choosing between 47 varieties of olive oil. There are two. Both are good. You pick one and move on.

The treasure hunt layer adds urgency. Costco rotates in limited-time, non-core items: a $300 drone, a Tumi luggage set, a hand-knotted Persian rug. These are not permanent inventory. When they are gone, they are gone. Members learn this rhythm and it turns shopping into an event. They visit more frequently than they otherwise would just to see what is new on the end caps. Higher visit frequency drives more basket volume. More basket volume justifies the membership fee. The cycle reinforces itself.

This is the kind of behavioral design that the best subscription businesses understand intuitively. If you want to study how to build this kind of compulsive engagement into your own model, check out the profile on Jeff Bezos here on Hustlers Library. Amazon Prime borrowed heavily from this same playbook: make the fee small, make the value obvious, make leaving feel like a loss.

Kirkland Signature: A Private Label That Beats the Brands

Kirkland Signature launched in 1995, named after Costco’s original headquarters city in Washington. Today it is not just a house brand; it is one of the most trusted consumer labels in the United States with annual sales exceeding $60 billion. That puts Kirkland ahead of Coca-Cola, Nike, and Campbell’s in annual revenue.

The strategy behind Kirkland is precise. Costco approaches the same manufacturers that produce name-brand products and negotiates a deal: make us the same thing (or better), we will order massive volume, and we will pay you reliably. In many cases, the Kirkland version is manufactured by the exact same facility or brand. Kirkland coffee is roasted by Starbucks. Kirkland batteries are manufactured by Duracell. Kirkland olive oil sources from top-tier Italian producers.

The result is that the Kirkland label carries a quality signal the average store brand cannot. Members are not trading down when they buy Kirkland. They are getting a better deal on the same or equivalent product. Kirkland typically prices 20% below the national brand equivalent.

For the business model, Kirkland does two critical things. First, it protects Costco’s pricing power. If a national brand tries to raise prices, Costco can respond by expanding the Kirkland alternative. The brand knows this and exercises restraint. Second, Kirkland drives margin that offsets the razor-thin margins on branded goods. Costco still caps Kirkland at its 14% rule, but the supplier cost is lower, so absolute dollar margin per unit is stronger.

Any business that can build a house product people trust over the default option has constructed a serious competitive moat. This is worth thinking about whether you are running an e-commerce brand, an agency, or a SaaS product with a freemium tier.

The Low Price Discipline: Why They Never Get Greedy

In 2009, during the financial crisis, Costco’s CFO Richard Galanti told analysts the company would not raise prices to protect margins. Costco absorbed cost increases where it could, went back to suppliers to negotiate, and held the line on member pricing. The same pattern repeated during COVID-era supply chain disruptions and again during the 2021-2022 inflation spike.

This is not charity. It is the most rational long-term business decision available to a membership model. Every time a member sees that Costco held a price or reduced it, that member’s likelihood of renewal goes up. Every time Costco raises a price without visible justification, they chip away at the most valuable asset they have: the belief that the membership is worth more than it costs.

Jim Sinegal famously refused to raise the price of Costco’s $1.50 hot dog and soda combo for decades, reportedly telling his successor Craig Jelinek: “If you raise the price of the hot dog, I will kill you.” The hot dog is a loss leader. But it is also a trust signal at the entrance of every warehouse. Members internalize it as proof that Costco is on their side.

This is a masterclass in what Charlie Munger called “surfing” a long-term structural advantage. Once members trust that Costco’s prices are always worth comparing against, they stop shopping around. That behavior is worth far more than any short-term margin pickup from a price increase.

If you are building a business and thinking about how to structure pricing, entity setup, and recurring revenue, getting the legal and operational foundation right matters early. Services like Northwest Registered Agent or LegalZoom can help you get a clean structure in place so you are building on solid ground from day one.

What the Numbers Actually Say

Let’s be specific about why this model is exceptional:

• Membership renewal rate: 92.7% in the US and Canada (FY2023)
• Membership fee revenue: $4.58 billion (FY2023)
• Net income: $6.29 billion (FY2023)
• Total members: 128.7 million cardholders
• Kirkland Signature annual revenue: approximately $60+ billion
• Average SKU count per warehouse: 3,700-4,000 vs. 142,000+ at Walmart
• Gross margin cap on products: 14% (vs. 25-35% at traditional grocery)

The business earns a reliable, high-margin annuity from memberships, then operates its retail at near-breakeven to make the membership feel indispensable. The model is almost impossible to replicate without the scale to actually deliver the pricing. That is the moat.

The Entrepreneur Angle: Building Your Own Membership Moat

You do not need 800 warehouses to apply this logic. The core insight is transferable: charge upfront for access, then obsessively over-deliver on the value of that access so renewal becomes the default choice.

A few modern businesses have done this well. Amazon Prime is the obvious descendant. Peloton tried and stumbled when the hardware obsession overshadowed the community. Substack writers who charge $10/month and deliver $100 worth of insight are running the same playbook Sinegal ran in 1983.

The operational backbone matters too. When you are running a recurring revenue business, your systems need to handle subscriptions, billing, communications, and team collaboration without friction. Google Workspace is worth considering early; it keeps your team communication, docs, and calendar unified so you are not cobbling tools together as you scale.

For more on how founders approach building compounding loyalty, the Zero to One book breakdown on Hustlers Library covers why monopoly thinking and trust-building go hand in hand.

Steal This: 5 Lessons from the Costco Playbook

1. Charge for access, not just transactions

If your business only makes money when customers buy, you are entirely dependent on repeat purchase behavior you do not control. Memberships and subscriptions front-load revenue and align your incentives with customer outcomes. If they do not get value, they cancel. That pressure makes you better.

2. Fewer options, better outcomes

Costco’s curation is a feature, not a limitation. Radical selectivity forces you to stock only things you genuinely believe in, which builds customer trust faster than a massive catalog ever could. Pick your lanes and own them.

3. Build a house product that competes with the category leader

Kirkland works because it matches or beats the incumbent on quality and undercuts on price. If you have a service business, your proprietary methodology or framework is your Kirkland. If you have a product business, your private label is. It is your most defensible margin and your clearest differentiation signal.

4. Never let short-term margin greed kill long-term trust

The $1.50 hot dog is not about hot dogs. It is about signaling to every member, every visit, that Costco is still on their side. Identify the equivalent signal in your business: the price you will not raise, the promise you will not break, the quality line you will not cross. That signal compounds into a loyalty asset your competitors cannot easily buy or replicate.

5. Make renewal the path of least resistance

A 92% renewal rate means the burden of action is on cancellation, not renewal. Design your product so that leaving feels like a downgrade. Stack enough genuine value into the membership that the decision to renew is automatic and the decision to cancel requires actual effort. That is not manipulation; it is delivering on your promise so well that rational people stay.