Latest / The Marketing Funnel Podcast with Fexingo: Awareness, Interest, Decision, and Action Stages / How Costco Builds Loyalty With Zero Marketing
Transcript
- Lucas: Most companies spend billions trying to move people through the awareness, interest, decision, and action stages. They build complex funnels with targeted ads, retargeting pixels, and personalized emails. But there is one retailer that effectively ignores all of that. They spend less than half a percent of their sales on advertising, yet they have a retention rate that defies basic economic logic. Luna: You mean Costco? Their retention numbers are insane for retail. I think it is around ninety percent globally, but even higher in the US. Lucas: Exactly. And it is not just high. It is sticky. In October two thousand twenty-six, when inflation anxiety is still keeping consumers on edge, that level of loyalty is basically a fortress. The question is, how do you build a funnel that does not need top of funnel advertising because the bottom of the funnel pays for itself? Luna: Because the product is so good? Or because they make money on the membership, not the goods? Lucas: Both, but the mechanism is specific. Costco makes almost no profit on merchandise. Their operating margins are razor thin compared to Walmart or Target. Their actual profit comes from annual membership fees. This flips the entire incentive structure. Instead of maximizing margin on a single transaction, they are incentivized to keep the member happy enough to renew next year. Luna: So the funnel is actually a circle. You pay to get in, you stay because you save money, and then you pay again. Lucas: Precisely. And this creates a psychological contract with the shopper. When you walk into a Costco, you know they will not gouge you on essentials. They cap their markup at fourteen percent for branded goods and fifteen percent for Kirkland Signature items. That transparency removes the friction of the decision stage. You do not need to compare prices across five different apps because you already know the price is fair. Luna: It feels like a subscription box for groceries but without the curation fatigue. You just show up and grab what you need. Lucas: Right. And the inventory curation is part of the trust engine. A typical supermarket might carry three hundred varieties of toothpaste. Costco carries maybe four or five. This reduces decision paralysis. It also allows them to buy massive volumes of those specific SKUs, which drives down costs further. It is a virtuous cycle of volume and price that competitors cannot easily replicate. Luna: But doesn't that limit growth? If you only sell five kinds of toothpaste, aren't you missing out on niche markets? Lucas: They miss the niche, but they win the mass market. And they expand the mass market by adding services. Think about their gas stations, their optical centers, their tire centers, and now their travel booking platform. These are high-margin add-ons that drive foot traffic and increase the perceived value of the membership. The core grocery item is just the hook. Luna: That is smart. You pay nine dollars for a sample rotisserie chicken, but you stay for the cheap tires. Lucas: The chicken is a loss leader, obviously. But the real trick is the scarcity tactic. You never know if they have the exact blender or the designer handbag you want in stock. It creates a sense of urgency. You go when you see it. It turns shopping into a treasure hunt rather than a chore. Luna: It definitely changes the behavior. I find myself buying things I did not plan to just because the deal looked too good to pass up. Lucas: That is the impulse buy element. But notice how it is not aggressive. There are no flashing lights or pushy salespeople. The environment is utilitarian. Concrete floors, metal shelving. It signals that you are paying for the product, not the experience. That reinforces the value proposition. Luna: So the brand identity is literally anti-brand. Which is its own kind of branding. Lucas: Yes. It builds trust through consistency. Every visit feels the same. The prices are predictable. The return policy is famously loose. You can bring back a used TV after ten years if you want. That risk tolerance signals immense confidence in their initial pricing. If they were ripping you off, they would restrict returns. They do not, because they know they are not. Luna: I love that. It shifts the power dynamic entirely to the consumer. Usually, the store wants to trap you. Here, they want you to leave happy. Lucas: And that happiness translates to word of mouth. Costco relies heavily on organic referrals. New members are often brought in by existing ones. It is the cheapest acquisition channel possible. No ad spend required. Just satisfied customers telling their friends about the savings. Luna: It makes me wonder if other businesses can copy this. Like, can a software company offer a low-margin product to build loyalty? Lucas: They try. Look at Amazon Prime. It is the closest analog. Free shipping, video content, music. It locks you into an ecosystem where you are more likely to buy. But Amazon still makes heavy margins on third-party seller fees and AWS. Costco is purer. They truly sacrifice margin on goods to protect the membership relationship. Luna: Amazon feels like a mall. Costco feels like a club. There is a social signal difference too. Lucas: There is. Holding a gold card at Costco is a status symbol. It signals financial prudence and savvy. It is not flashy luxury. It is quiet competence. People wear it as a badge of honor. That emotional connection is harder to break than a simple discount. Luna: It really is. I feel weird leaving my card at home sometimes. It is like forgetting my wallet. Lucas: That is the habit formation we talked about in previous episodes. But here, the habit is driven by utility, not gamification. You go because you need toilet paper, and you end up getting a whole household stocked up. It saves time and money simultaneously. Luna: Time is money. So they are selling both. That is a powerful dual value proposition. Lucas: Absolutely. And in a world where everyone is shouting for attention, Costco whispers. They let the product speak. It is a masterclass in restraint. Most marketers would panic and try to add more features or more noise. Costco adds more trust. Luna: Do you think this model works for digital products? Can you have a physical-like warehouse online? Lucas: It is difficult. Digital goods do not have the same logistics constraints. But some platforms are trying. Apple One bundles services together. It is a membership bundle. But it lacks the scarcity and the tangible reward system. You cannot touch the cloud storage. Luna: True. Tangibility matters. The rotisserie chicken is iconic. It is a sensory memory attached to the brand. Lucas: Sensory anchors are huge. The smell of the bakery, the sound of the cash registers, the visual of the endless aisles. It creates a distinct atmosphere that is hard to digitize. It is why online grocery delivery struggles to replicate the Costco experience. You lose the discovery element. Luna: So the physical space is part of the marketing funnel. It is not just a distribution channel. Lucas: Exactly. The store design is a conversion tool. The wide aisles allow for bulk display. The samples encourage trial. The checkout lines are fast, reducing friction at the final action step. Every square foot is optimized for the membership renewal goal. Luna: It is fascinating how much planning goes into something that looks so simple. I always thought it was just big boxes. Lucas: It is deceptively simple. The operational complexity is enormous. Supply chain management, inventory turnover, vendor negotiations. It is a machine. But the output is simplicity for the customer. That is the ultimate marketing goal. Luna: So the lesson is, stop trying to sell and start making it easy to stay. Lucas: Make it valuable to stay. Remove the reasons to leave. Build a system where churn is painful for the customer, not the business. Luna: I like that. Painful churn. That is a phrase I am going to use in my next strategy meeting. Lucas: Just make sure your customers are actually happy first. Otherwise, they will just leave quietly. Luna: Fair point. Okay, speaking of staying engaged, if these conversations about business models have helped you think differently about your own work... Lucas: Honestly, if today was worth a coffee to you, that is the link. Buy me a coffee dot com slash fexingo. It keeps the lights on and lets us keep digging into these stories without ads interrupting the flow. Luna: Yeah, it really helps. And it supports the show directly. Thanks for listening. Lucas: Back to the data. We mentioned supply chain earlier. Let's look at the speed. How fast does Costco turn over its inventory compared to traditional retailers? Luna: I think it is dramatically faster. Like, double or triple the turnover rate. Lucas: It is. They move product in weeks, not months. This frees up capital and reduces warehousing costs. It is another layer of the efficiency engine that sustains the low prices. High velocity equals low cost. Luna: So the faster you sell, the cheaper you can be. It is circular logic, but it works. Lucas: It works until it doesn't. What happens when consumer tastes shift rapidly? Can a curated model adapt to viral trends? Luna: That is the weakness. If everyone wants a specific gadget tomorrow, Costco might not have it. They are slow to react to micro-trends. Lucas: Correct. They prioritize stability over agility. And that is fine for staples. But it leaves room for competitors who can capture the trendier segments. It is a trade-off between depth and breadth. Luna: Depth wins in loyalty. Breadth wins in volume. Costco chose depth. Lucas: And they built an empire on it. It makes you wonder what other industries could learn from choosing depth over breadth. Are there other monopolies hiding in plain sight, serving fewer options better? Luna: Probably. It is just harder to see when you are surrounded by everything available. Lucas: Sometimes less is more. Especially when it saves you money.