Membership and Warehouse Clubs

Costco sells most of its goods at or near cost and makes almost all of its profit from the $65 you pay just to walk in the door. Markups are capped around 14% on most items, half what normal grocery runs, which should make Costco a terrible business. Instead it is one of the most profitable retailers in the world, because the merchandise is basically a break-even lure for the membership. In fiscal 2023 membership fees totaled roughly $4.6 billion, nearly pure margin with no cost of goods and no spoilage, and renewal rates run above 90%. Amazon Prime runs the identical architecture: the annual fee buys commitment, and commitment drives spend.

For founders and operators, the temptation is to copy the fee and assume the lock-in follows. It does not. The fee only renews itself when the perceived savings make paying feel automatic, and the underlying product has to be good enough to pull people back through the door again and again. The high-margin fee can subsidize a better experience, but it will not rescue a mediocre one. The precise conditions that make a membership renew on autopilot, and where it quietly collapses, are what the app holds back.