Latest / The Marketing Funnel Podcast with Fexingo: Awareness, Interest, Decision, and Action Stages / How Costco Built a Marketing Funnel on Membership
Transcript
- Lucas: So, Costco. The company that basically invented the 'pay to shop' model. And the more I look at it, the more I think their entire marketing funnel is built on a single, almost counterintuitive idea: the membership fee isn't a barrier—it's the product. Luna: That's a bold claim. I mean, people don't exactly wake up thinking, 'I can't wait to pay sixty dollars a year to wander around a warehouse.' Lucas: Right, but that's the trick. They're not buying the right to shop—they're buying the promise of a treasure hunt. And that flips every stage of the classic AIDA funnel on its head. Let's break it down. Luna: I'm listening. Where do you want to start? Lucas: Let's start at the very top: awareness. With most retailers, awareness is about getting you in the door. For Costco, awareness is about getting you to understand the value of the membership itself. They run very little traditional advertising. Instead, they rely on word of mouth and the occasional direct mail piece. But the real engine is the membership referral program—where existing members can bring a guest, and that guest gets a taste of the treasure hunt. Luna: So the product demo is literally the warehouse tour. You walk in, you see the giant TV, the pallets of olive oil, the sample lady handing out a bite of something—you're hooked. Lucas: Exactly. And that's the interest stage. But it's not interest in a specific product—it's interest in the experience. The 'Costco treasure hunt' is a well-documented phenomenon. Merchandise is constantly rotating. You never know if that Vitamix or that giant bag of almonds will be there next week. That scarcity, that unpredictability, is what keeps people coming back. It's the interest stage built on FOMO, but in a really physical, visceral way. Luna: It's like a casino. The lights, the noise, the possibility of a win. But instead of slot machines, it's a four-pack of balsamic glaze. Lucas: Ha, exactly. And that's where the decision stage gets really interesting. Because in a traditional funnel, the decision is 'should I buy this product?' At Costco, the decision is 'should I join the club?' And they've engineered that decision to be almost a no-brainer. The math is simple: if you buy enough of certain staples—say, paper towels, diapers, or gasoline—the savings on those alone can cover the annual fee. So the decision becomes rational, even if the experience is emotional. Luna: But isn't that a risky proposition? You're asking people to commit sixty bucks before they've bought anything. That's a high barrier at the top of the funnel. Lucas: It is, and that's why their renewal rate is so critical. Costco has something like a ninety-three percent renewal rate in North America. That tells you the decision, once made, is validated over and over again. The real magic, though, is in the action stage. Because the action isn't just a purchase—it's the ritual of the trip. You go, you push the giant cart, you grab the samples, you maybe buy a rotisserie chicken because it's five bucks and you can't resist. That's the action stage: a repeatable, almost habitual behavior. Luna: And that repeatable behavior is what feeds back into awareness. You tell your friend, 'You have to come with me, they have this amazing thing.' So the funnel loops back on itself. Lucas: That's the genius. The funnel isn't linear—it's a flywheel. The action stage becomes the awareness engine for the next member. And it's all powered by this idea of the treasure hunt. I read a great piece about how Costco's buyers are encouraged to take risks on oddball items—like a giant stuffed bear or a kayak. Those items might not sell in huge volume, but they generate buzz and create that 'you never know what you'll find' feeling. Luna: So they're basically using the product assortment itself as a marketing channel. The more unexpected the item, the more likely it is to get shared on social media or become a topic of conversation. Lucas: Precisely. And then there's Kirkland Signature. That's their private label, and it plays a huge role in the decision stage. Kirkland products are typically twenty to thirty percent cheaper than national brands, and the quality is often comparable or better. For the member, choosing Kirkland feels like a smart, savvy choice. It reinforces the value of the membership every time they put it in their cart. Luna: So Kirkland is almost like a loyalty program in itself. You're not just loyal to Costco—you're loyal to the brand that only exists because you're a member. Lucas: Exactly. And that's a really powerful feedback loop. The more you buy Kirkland, the more you feel like you're in on the secret. And the more you feel that, the less likely you are to shop anywhere else. That's the action stage turning into retention, which is its own stage, really. Luna: But what about the 'decision' stage for specific products? I mean, you walk in with a list, but you often leave with a lot more than you planned. How does that work? Lucas: Well, that's where the impulse buy comes in. But it's not random impulse—it's engineered. The layout is constantly changing. You have to walk past the electronics to get to the groceries. The samples are strategically placed. And the prices are so good on some items that you almost feel like you're losing money by not buying them. That's a classic retail tactic, but Costco takes it to an extreme because they're not trying to maximize profit per item—they're trying to maximize the perceived value of the membership. Luna: So every trip reinforces the decision to renew. Every time you save a few bucks on something, you think, 'This is why I pay the fee.' Lucas: Right. And then there's the food court. The $1.50 hot dog and soda combo. They've kept that price for decades, even as costs have gone up. It's a loss leader, but it's also a symbol. It says, 'We're on your side. We're not trying to squeeze every penny out of you.' That builds an enormous amount of goodwill. Luna: And goodwill is a massive part of the awareness stage. That's what makes people evangelize about Costco. They don't just like it—they feel a sense of pride about being a member. Lucas: Yeah, it's almost tribal. And that's something that a lot of brands would kill for. But it's not easy to replicate. Costco's whole model is built on a peculiar combination of operational efficiency, extreme value, and a culture that treats employees well. They pay their workers above industry average, and they have lower turnover. That translates into better customer service, which feeds the positive experience. Luna: So it's not just the funnel—it's the entire business model that supports the funnel. The marketing is almost a byproduct of the way they operate. Lucas: That's a really good way to put it. And I think that's the lesson for other marketers. You can't just bolt on a treasure hunt or a membership fee. You have to build the entire experience around that promise. If you promise exclusivity, you have to deliver it. If you promise value, you have to be willing to sacrifice margin. Luna: What about the digital side? Costco has been slower to embrace e-commerce. How does that play into the funnel? Lucas: That's a great question. Costco's e-commerce has been growing, but it's still a fraction of overall sales. And that's intentional. They know that the treasure hunt is a physical experience. Online, it's harder to recreate that serendipity. So they use the website more for replenishment—things you buy regularly—while the warehouse remains the place for discovery. That's a smart way to service both needs without diluting the core experience. Luna: So they're not trying to be Amazon. They're using digital to support the physical funnel, not replace it. Lucas: Exactly. And that's a crucial point for any brand thinking about omnichannel. You don't have to be everywhere in the same way. You have to understand what each channel does best in your own funnel. For Costco, the store is the stage, and the website is the backstage—it's where you get the props you need for the next act. Luna: Speaking of props, let's talk about the samples. They're almost a microcosm of the funnel. You taste, you like, you buy. It's a mini AIDA right there in the aisle. Lucas: Ha, you're right. Each sample is a tiny funnel. And they're so effective that they've become a cultural meme. People go to Costco on a Saturday just for the samples. And that's free entertainment, which adds to the overall value of the membership. Luna: So the samples are not just driving sales of that specific product—they're enhancing the whole shopping experience. It's another tool in the treasure hunt kit. Lucas: And that's the thing—everything they do, from the samples to the hot dog to the rotating merchandise, it all reinforces the same message: 'You made a smart choice by joining us.' And that's a powerful thing. It turns a transaction into a relationship. Luna: It sounds like Costco has mastered the art of the feel-good purchase. You don't just buy stuff—you feel like you've won. Lucas: And winning is addictive, which is probably why membership numbers keep climbing. In 2026, they're still adding members, and renewal rates remain the gold standard in retail. Luna: I want to come back to something you said earlier about the goodwill and the pride of being a member. That's such a big part of why people talk about Costco. And that's something that a lot of brands try to manufacture with referral programs and incentives, but it rarely feels authentic. Lucas: Right, because you can't buy that kind of advocacy. It has to be earned. And Costco earns it by consistently delivering on its promise. That's the real lesson—your marketing funnel is only as strong as the experience behind it. If the product or service doesn't live up to the hype, no amount of clever funnels will save you. Luna: It's funny, we've been talking about marketing, but it feels more like a masterclass in business fundamentals. Lucas: That might be the best takeaway of all. The best marketing funnels are the ones that disappear into the product itself. Costco doesn't need to advertise because the experience is the ad. And that's something we could all aspire to. Luna: And on that note, if these marketing conversations have sparked something you've actually used in your own work, we'd love for you to consider supporting the show. You can buy us a coffee at buy me a coffee dot com slash fexingo. It helps keep this podcast ad-free, and we really appreciate it. Lucas: Yeah, it's a small thing that goes a long way. But let's get back to the funnel. One more angle I want to explore: how Costco uses scarcity—not as a gimmick, but as a core part of the experience. Do you remember the great toilet paper shortage of 2020? Costco became the go-to for hoarders, but even in normal times, there's a sense of 'grab it while you can' that drives urgency. Luna: That's true. I've definitely bought things I didn't need because I thought they might not be there next time. It's like a game. Lucas: Exactly. And that game is what keeps people engaged. It's not just about the product—it's about the thrill of the hunt. And that's a lesson for any brand: find a way to make the shopping experience itself memorable, and you'll create a funnel that people want to come back to. Luna: Well, I think we've covered a lot of ground. From the membership model to the treasure hunt to the hot dog, Costco really is a fascinating case study in building a marketing funnel that's more than just a series of steps—it's a destination. Lucas: Couldn't have said it better. And on that note, we'll see you next time, when we look at another brand that's rewriting the rules of the funnel.