5 Genius Ways Costco Became the Kings of Bulk Buy

What if I told you that the world’s third-largest retailer was a members-only bulk buy warehouse?

According to Deloitte’s 2021 Global Powers of Retailing report, Costco is the third-largest retailer in the world, behind only Walmart and Amazon. The brand brings in an incredible $152.7 billion every year.

That’s pretty impressive given how counter-intuitive Costco’s business model is:

  • It charges people to shop.

  • The store experience is best described as “bare bones.”

  • Most products are sold in laughably large amounts.

So how did Costco become the world’s third-largest retailer? It’s partly down to the brand’s use of behavioral science and psychology through principles like Scarcity, Sunk Cost, Salience, and more.

Prefer to watch these insights? Check out the video here:

1. Scarcity: The psychology principle that powers Costco

To shop at Costco, you have to be a member. For between $60 and $120 USD, you unlock the ability to shop in its stores. But why would people want to pay to shop when they could visit any other store for free?

Because memberships give Costco’s deals a feeling of scarcity.

People feel special because they’re getting exclusive sales not available to general public. They pay for Costco memberships because they don’t want to miss out on deals that other people can get.

When your neighbor gets a killer deal on toilet paper that’s only available for Costco members, non-members get a feeling of FOMO — the Fear of Missing Out.

Psychology tells us that people hate to lose out. In fact, the psychological pain of losing something is twice as powerful as the joy of gaining the exact same thing.

2. Sunk Cost Fallacy: The surprising reason Costco customers spend more

Not only does Costco make more money than its competitors overall, it also makes more money per square foot. They make $1,124 on average, while competitors like Target and Sam’s Club bring in only $308 and $650 dollars.

It’s not because Costco has better products or a more attractive store. It’s down to something called the Sunk Cost Fallacy.

This principle says that people are more likely to stick with an activity if they’ve made a significant financial or time investment. So in other words, when someone pays a Costco membership fee, they want to get their money’s worth.

The Sunk Cost Fallacy states that people are more likely to stick with an activity if they’ve made a big financial or time investment.

2017 study found that people who shop at club stores, like Costco, end up visiting the store more often and spending more per trip than they would if they weren’t paying for a membership.

People are more likely to buy things they otherwise wouldn’t and rationalize it by saying to themselves, “Well, I’ve already spent the money on the membership so… why not?”

3. Reciprocity: Costco’s secret weapon

If you’ve ever visited a Costco, you’ve probably noticed their free sample booths dotted around the store — usually with a massive line of people waiting to grab a bite.

But why does Costco give up so much floor space to free samples when they could use it to sell products instead? It’s because companies know that sampling drives sales and some studies say it can drive up to 2,000% more.

The reason it works is down to a proven persuasion principle called Reciprocity — the social norm of responding to a positive action with another positive action. It’s why you feel indebted when someone does you a favor — you want to pay it back.

Reciprocity is the social norm of responding to one positive action with another positive action.

A famous example of Reciprocity is the Hare Krishna and their free flowers. The Hare Krishna is a religious sect that went to the United States in the 1970s to grow its following.

But they had a hard time at first.

The sect needed donations, but no one wanted to give them any money. It was only after the Hare Krishna began giving out free flowers to people that passed by on the street that donations skyrocketed.

Both Costco and the Hare Krishna benefit from giving something away for free — it makes people more likely to buy from them or donate to them. All because of the power of Reciprocity.

4. Peak-End Rule: You can return (almost) anything

Costco is known for its fantastic customer service.

That’s partly down to how they treat their employees — it pays people at least twice the minimum wage. But Costco also has an excellent returns policy.

It doesn’t matter if you’re missing a receipt or you bring back something that’s ten years old. They will refund 100% of your money (with some limits on electronics).

You might know that a great returns policy is good business, but according to a psychology principle called the Peak-end Rule, it can make or break a business.

Peak-end says people judge an entire experience by only two points — how they felt at its emotional peak and end. Not the average of every moment of the experience.

The Peak-end Rule says that people judge an entire experience by only two points — how they felt at its emotional peak and its end. Not the average of every moment of the experience.

A great returns policy keeps people coming back because a disappointing purchase can be an “end” and an emotional peak for many people. If your brand’s return policy is flexible, it can go a long way to building trust and good memories for your customers. But if your returns policy isn’t so great, it can counteract many of the things you’re doing right.

5. Salience: The store layout is purposely confusing

If you’re a regular Costco shopper, you might notice that your favorite products move around the store a lot, and that’s on purpose.

The company moves around most of its inventory regularly, so shoppers have to go on what they call “treasure hunts” to find their favorite items.

If you’re searching for laundry detergent but aren’t sure where it is this week, you’re forced to pass by new products that Costco hopes you’ll notice and buy.

This “treasure hunt” strategy can increase the salience of different products. Salience describes how prominent or emotionally striking something is. If an element seems to jump out from its environment, it’s salient. If it blends into the background and takes a while to find, it’s not.

Salience describes how prominent or emotionally striking something is.

Costco knows that if people have to walk past many other things to get to their favorites, they’re more likely to notice and pick up an additional product.

Bottom Line

Costco isn’t just great at getting people to buy. Its customer experience creates brand fanatics.

What’s their secret?

Although Costco might be savvy in applying psychology and behavioral science, Costco never sacrifices long-term customer relationships for a short-term sneaky sale.