Latest / The Marketing Funnel Podcast with Fexingo: Awareness, Interest, Decision, and Action Stages / How the Marketing Funnel Explains Costco's Membership Model
Transcript
- Lucas: So here's a number that stopped me this week: Costco generated over two hundred and fifty billion dollars in revenue last fiscal year. And almost all of that came from just eight hundred and sixty locations worldwide. Luna: That's wild. For context, Walmart has over ten thousand stores globally and does about six hundred billion. So Costco is punching way above its weight. Lucas: Exactly. And the key to understanding why is the marketing funnel. But not in the way you'd expect — Costco barely does any traditional advertising. No TV spots, no digital display campaigns. Their entire marketing is built into the business model itself. Luna: Right. And that starts with the membership fee. You have to pay to even enter the store. That's like charging people for the privilege of being marketed to. Lucas: And it's genius because it forces the awareness stage to be extremely high-intent. You don't just wander into a Costco. You make a conscious decision to join. That upfront fee — sixty dollars a year for a basic Gold Star membership — acts as a filter. Luna: So the awareness is earned through word of mouth and reputation. People hear about the deals from friends or see the giant parking lots and decide to check it out. Lucas: Exactly. And once you're in, the interest stage is literally designed into the store layout. You have to walk through a maze of pallets stacked high with everything from televisions to toilet paper. There's no direct path to the exit. Luna: That's the treasure hunt effect. They rotate products constantly, so you never know what you'll find. It keeps you engaged and curious. Lucas: And that's where the decision stage gets interesting. Costco caps its markup on most items at fourteen percent, but on its own Kirkland Signature brand it's even lower — around two percent. So the price itself becomes the call to action. Luna: Two percent margin on a product? That's almost nothing. But they make it up on volume and the membership fees, which are pure profit — over four billion dollars last year alone. Lucas: Right. So the action stage isn't just checking out. It's the membership renewal. The real conversion happens when you decide to come back next year. And Costco's entire funnel is designed to make that renewal feel like a no-brainer. Luna: I've heard that the average Costco member spends about three hundred dollars per visit. And if they're coming every couple of weeks, that membership fee is easily justified. Lucas: And they track that data obsessively. They know that if you don't come in the first three months after joining, your likelihood of renewing drops significantly. So they send targeted offers to pull you back. Luna: That's a classic retargeting strategy, but applied to a brick and mortar context. It's fascinating how the digital funnel concepts map onto physical retail. Lucas: One other thing I love: Costco limits the number of SKUs it carries to about thirty-seven hundred, versus a typical Walmart which has over a hundred thousand. That scarcity actually helps the decision stage. Luna: Right. Too many choices can cause decision paralysis. By limiting options, Costco makes it easier for customers to say yes. And the bulk sizes encourage larger purchases. Lucas: So the entire funnel is optimized for high average transaction value and high retention. They don't need to spend on advertising because the store itself is the ad. Luna: And the membership model means they're incentivized to keep prices low and quality high. If they ever started gouging, members would leave and that recurring revenue would dry up. Lucas: It's a virtuous cycle. And it's so embedded that even their famous rotisserie chicken — which they sell at a loss for four ninety-nine — is a top of funnel loss leader that drives foot traffic. Luna: I read that they sell over a hundred million of those chickens a year. That's a lot of people walking past the electronics aisle. Lucas: Exactly. And that's the brilliance — every element of Costco's operation, from the product selection to the pricing to the store layout, is a marketing funnel in disguise. Luna: So if you're a marketer listening, the takeaway might be: think about how your product or service can create its own awareness rather than relying on paid channels. Lucas: And think about pre-commitment. The membership fee is a classic pre-commitment device that aligns the customer's interest with the company's incentive to deliver value. Luna: Yeah, that's a powerful concept. And it's something we could apply in many industries. Lucas: If these marketing conversations have sparked something you've actually used in your own work, a couple of dollars a month is genuinely what keeps these going. You can find us at buy me a coffee dot com slash fexingo. Luna: It really does make a difference, and it helps us keep the show ad-free and focused on ideas like this. Lucas: So next time you're walking through a Costco with that oversized cart, take a moment to notice how the entire experience is a masterclass in funnel design. Luna: I know I will. And maybe I'll grab a rotisserie chicken while I'm at it. Lucas: Just don't forget your membership card.