Latest / The Marketing Funnel Podcast with Fexingo: Awareness, Interest, Decision, and Action Stages / How Costco Keeps Its Marketing Funnel Simple
Transcript
- Lucas: Costco does not advertise. No TV commercials, no radio spots, no digital banners. And yet it generated over 250 billion dollars in revenue last year. That is a marketing funnel that looks almost nothing like what we usually talk about on this show. Luna: No awareness spend at all? How does anyone even know Costco exists? Lucas: Word of mouth, basically. And the membership model itself. You pay an annual fee — sixty to a hundred and twenty dollars — and that fee essentially flips the traditional funnel. Instead of building awareness to drive purchase, Costco uses the membership to pre-sell the intent to buy. Luna: So the transaction starts before the customer ever walks in the door. The membership is the commitment. Lucas: Exactly. In a classic AIDA funnel — awareness, interest, decision, action — Costco collapses the first two stages. Awareness comes from a friend saying, 'You have to see the rotisserie chicken.' Interest is immediate because the membership feels like a key to a club. By the time you hand over your card at the entrance, you are already in the decision stage. Luna: And the action stage isn't just buying something — it's buying a cartful. The membership fee creates a sunk-cost effect that encourages bigger trips. Lucas: That is a huge psychological lever. You have already paid to be there, so you want to maximize the value of that visit. Costco's entire warehouse layout is designed to exploit that. Wide aisles, pallet stacks, limited choices — they carry about four thousand active SKUs per warehouse, compared to forty thousand at a typical grocery store. Luna: Forty thousand versus four thousand. That is a ten-to-one ratio. Doesn't that hurt the decision stage? Having fewer options? Lucas: It actually accelerates it. Barry Schwartz's 'paradox of choice' research shows that too many options paralyze consumers. Costco removes that paralysis. You want peanut butter? There are two brands, maybe three. You grab one and move on. The decision stage becomes almost frictionless. Luna: And that ties into the treasure-hunt element. Because the selection changes constantly, there is a scarcity cue — if you see it, buy it now, because it might not be here next week. Lucas: That is the hidden engine of the Costco funnel. The limited SKU count forces a constant rotation. One week it's a forty-two-inch television, the next week it's a case of olive oil. That unpredictability keeps the interest stage alive even for loyal members. You never know what you will find. Luna: So the awareness and interest stages are actually built into the shopping experience itself, not into pre-purchase advertising. That is a completely different funnel architecture. Lucas: Right. And then there is the Kirkland Signature brand. Kirkland now accounts for roughly 25 percent of Costco's sales. It functions as a trust shortcut in the funnel. When a member sees Kirkland next to a national brand at a lower price, they do not need to research — they trust that Costco has already vetted the quality. Luna: It is almost like a second-level funnel within the store. Awareness of Kirkland comes from repeated exposure, interest from the price gap, decision from the trust built over years, and action because it is right there in the cart. Lucas: And the pricing strategy is deliberately extreme. Costco caps its markup at 14 percent on most items, and on Kirkland products it is often lower. The hot dog and soda combo has been one dollar fifty since 1985. That flat price for forty years is not a menu item — it is a marketing asset. It signals to every member, 'We will not gouge you.' Luna: That is a loss leader in the purest sense. They probably lose money on every hot dog sold, but it anchors the entire value perception of the store. Lucas: Costco's CFO has said the hot dog price is 'sacred.' They would rather raise the membership fee than touch that combo. Because the hot dog is the symbol of the funnel's promise: you pay to enter, and we will give you deals you cannot get anywhere else. Luna: Let's talk about the membership renewal rate. Last reported number was over 90 percent in North America. That is astonishing for any subscription business, let alone a retailer. Lucas: It creates a compounding effect on the funnel. Each year, the member base becomes more loyal, more familiar with the layout, more likely to buy Kirkland, more resistant to competitors. The funnel does not just convert — it deepens over time. That is the opposite of most marketing funnels, which leak customers at every stage. Luna: And that loyalty is why Costco can get away with such a narrow funnel at the top. They do not need to acquire millions of new shoppers every quarter. They just need to keep the ones they have happy. Lucas: Which brings us to the employee side. Costco pays retail workers an average of over 25 dollars an hour, with good benefits. Turnover is around 10 percent, versus the industry average near 60 percent. Happy employees provide better service, which reinforces the trust stage of the funnel. Luna: So the funnel is not just about the customer journey — it is about the employee journey too. That is a holistic view most companies miss. Lucas: If these marketing conversations have sparked something you have actually used in your own work, or if you just enjoy the show, listener support is what keeps this podcast ad-free. You can help at buy me a coffee dot com slash fexingo. Luna: Yeah, it is a small way to keep the episodes coming, and we really appreciate it. Lucas: Back to Costco. One question that comes up is, could Amazon replicate this model? Amazon has Prime, which is a membership, but it is a completely different funnel. Prime is about convenience and selection — millions of SKUs, free shipping, streaming video. Costco is about constraint and discovery. Luna: They are almost opposites. Amazon says 'anything you want, anytime.' Costco says 'here is what we picked for you, and it is a great deal.' Lucas: And that constraint is exactly why Costco's funnel is so hard to copy. The treasure-hunt experience relies on physical retail — the thrill of walking down an aisle and seeing a pallet of something unexpected. Online, that sensation is much harder to replicate. Luna: Walmart tried with Sam's Club. It has a similar membership model, but it has never matched Costco's renewal rates or brand loyalty. What is the difference? Lucas: Sam's Club focuses more on business customers and bulk staples. Costco leans into the experiential side — the samples, the seasonal items, the high-end electronics. Also, Costco's store design forces you to traverse the entire warehouse to get to the checkout. You have to go through the produce, the electronics, the clothing. That increases dwell time and impulse purchases. Luna: So the physical layout is a deliberate part of the funnel architecture. Lucas: Absolutely. And it is all driven by that initial membership fee. Costco makes roughly 4 billion dollars a year just from membership fees. That is pure profit. It gives them the freedom to keep margins razor-thin on merchandise and still be incredibly profitable. Luna: That is the genius of the inverted funnel. The membership fee is not just revenue — it is a strategic tool that aligns the entire business model around retention rather than acquisition. Lucas: Right. Most retailers spend heavily on advertising to pull people in. Costco spends almost nothing and lets the membership and the in-store experience do the work. It is a reminder that the most effective marketing funnel is sometimes the one you barely notice. Luna: And one that probably does not need a digital transformation to work. Lucas: Exactly. Next episode, we will look at a company that took the opposite approach — a digital-first funnel that built a billion-dollar brand almost entirely online.