Why Does Costco Want You to Pay Before You Buy Anything?
Imagine walking into a supermarket.
You haven't bought any groceries.
You haven't picked up a single product.
You haven't even entered the shopping aisles.
But the supermarket wants you to pay:
$65.
Just for the right to shop there.
Sounds strange?
That is essentially how Costco works.
In the United States, a standard Costco membership costs $65 per year.
And millions of people happily pay it.
In fact, Costco collected approximately:
$5.91 billion
in membership fees during its 2026 fiscal year.
That is before considering the nearly $300 billion in merchandise it sold.
So here is an interesting question.
Is Costco really a supermarket?
Or is it a membership business that happens to sell groceries?
The answer explains one of the most powerful business models in modern retail.
Most Supermarkets Make Money When You Buy Something
Imagine two supermarkets.
Both sell milk, eggs, meat, bread and household products.
Supermarket A lets anyone walk in.
Supermarket B charges customers an annual membership fee.
At first, Supermarket B seems to have a disadvantage.
Why would anyone pay money just to enter a store?
But now imagine Supermarket B uses that membership income to help support a business built around lower prices.
Customers discover that they can save money by shopping there regularly.
They return.
They buy more.
They renew their memberships.
And the cycle repeats.
That is the basic idea behind Costco.
But the real numbers make the story much more interesting.
Costco Collected $5.91 Billion Before Selling a Single Product
According to Costco's fiscal 2026 annual report, the company generated:
$297.25 billion in net merchandise sales.
It also collected:
$5.91 billion in membership fees.
Total revenue reached approximately:
$303.15 billion.
Now compare that with its operating profit.
Costco reported:
$11.69 billion in operating income.
Operating income means the money left after merchandise costs and operating expenses, but before interest, taxes and certain other items.
Here is the surprising comparison:
Membership fees: $5.91 billion
Operating income: $11.69 billion
Membership fees were equivalent to approximately:
50.6% of operating income.
That is enormous.
But there is an important distinction.
It does not mean membership fees were 50.6% of Costco's profit.
Membership revenue has associated costs, and Costco does not separately report a complete profit figure for its membership business.
The comparison simply shows how financially important that revenue stream is.
Why Does Costco Charge You to Spend Money?
Imagine paying $65 to enter a store.
You might think:
I already paid. Now I need to get my money's worth.
That creates an interesting incentive.
If you pay for a membership, you have a reason to keep returning.
You may buy groceries there instead of somewhere else.
You may purchase household supplies.
You may fill your car with gasoline.
You may buy a television.
You may even book a vacation.
The more you shop, the more valuable your membership can feel.
And the more valuable it feels, the more likely you are to renew it.
This creates a cycle:
Pay membership fee
↓
Shop regularly
↓
Save money on purchases
↓
Feel membership is worthwhile
↓
Renew membership
↓
Shop again
Costco is not simply selling products.
It is selling customers a reason to keep coming back.
Almost 90% of Members Keep Paying
This is one of the most important numbers in Costco's business.
At the end of fiscal 2026, Costco reported membership renewal rates of:
92.3% in the United States and Canada.
And:
89.8% worldwide.
In simple terms, roughly nine out of ten memberships in the measured worldwide renewal population were renewed.
That is remarkable.
Imagine operating a business where most customers voluntarily pay you again every year for continued access.
You do not have to convince every customer to start from zero.
You already have an enormous base of people who have demonstrated that they value the service.
That is why investors pay close attention to renewal rates.
They reveal something that revenue alone cannot show.
Do customers still believe the membership is worth paying for?
Costco Has 84.1 Million Paid Members
At the end of fiscal 2026, Costco reported approximately:
84.1 million paid memberships.
Including household cards, it had approximately:
150.4 million cardholders.
These are not the same number.
A paid membership can include additional household access.
So 150.4 million cardholders does not mean 150.4 million separate membership fees.
But the scale is extraordinary.
Think about what that means.
Tens of millions of customers have agreed to pay for the privilege of shopping with Costco.
Before choosing a single item from the shelves.
The Membership Fee Changes the Economics
Here is where the business model becomes powerful.
A traditional retailer depends heavily on the difference between:
what it pays suppliers
and:
what customers pay at checkout.
That difference helps cover the retailer's expenses and generate profit.
Costco earns money from merchandise too.
But it also receives a separate stream of membership revenue.
That additional income helps support a model focused on low prices, high sales volume and operational efficiency.
It does not eliminate the need for profitable merchandise sales.
It changes the overall economics of the business.
Think of it this way.
A regular supermarket must attract shoppers without charging them an entrance fee.
Costco has already established a financial relationship with its members.
And that relationship can continue for years.
Costco Makes Surprisingly Little on Each Dollar of Merchandise
In fiscal 2026, Costco generated approximately:
$297.25 billion in net merchandise sales.
The cost of that merchandise was about:
$264.28 billion.
The difference was approximately:
$32.97 billion.
That represents a merchandise gross margin of roughly:
11.1%.
In other words, for every $100 in merchandise sales, about $11.10 remained after the cost of the merchandise itself.
That is not final profit.
Costco still had to pay for:
employees,
buildings,
utilities,
technology,
distribution,
administration,
and other operating expenses.
But it shows something important.
Costco is designed to operate with relatively thin merchandise margins.
The company explicitly describes its strategy as combining low prices, limited product selection, high sales volume and rapid inventory turnover.
What If Costco Tried to Make More Money on Every Product?
Imagine Costco suddenly decided to raise prices significantly.
It might earn more on each item.
But customers could start asking:
Why am I paying a membership fee if the prices are no longer special?
Some might shop less.
Others might stop renewing.
That could damage something much more valuable than the extra profit on one product.
The membership relationship.
This is why low prices are not simply a marketing tactic.
They help protect the reason customers pay to belong.
The $65 Membership Is Not Really About $65
Imagine you pay $65 for an annual membership.
Now suppose shopping at Costco saves you:
$10 per visit.
After seven visits, your hypothetical savings would reach:
$70.
You have recovered more than the cost of membership.
Everything after that may feel like an additional benefit.
Of course, actual savings vary.
Not every product is cheaper.
Travel costs matter.
Buying more than you need can erase savings.
But the basic idea is powerful.
If customers consistently believe they save more than they pay, renewing becomes an easy decision.
The $65 fee becomes less important than the value customers believe they receive.
Costco Wants You to Buy More Often, Not Just Pay Once
A membership fee alone would not make Costco a successful business.
Imagine a store charging $65 but offering terrible prices.
Customers might pay once.
Then leave.
The real advantage comes from combining:
membership
low prices
high purchasing volume
efficient operations
customer loyalty.
Each part supports the others.
Low prices encourage shopping.
More shopping creates volume.
Higher volume can improve purchasing efficiency.
Operational efficiency helps support low prices.
Low prices encourage renewal.
And renewal generates another year of membership revenue.
This is the cycle Costco wants to protect.
Why Does Costco Sell So Few Different Products?
Walk into a typical supermarket.
You might find dozens of different brands of the same product.
Costco often offers a much narrower selection.
Why?
Because concentrating sales on fewer items can create advantages.
Imagine two stores.
Store A
Sells 100 different types of cereal.
Store B
Sells 10 carefully selected types.
If Store B sells enormous quantities of those 10 products, it may be able to negotiate favorable purchasing terms and simplify inventory management.
It can buy in bulk.
Move products quickly.
Reduce handling.
And operate more efficiently.
Costco's limited-selection strategy is part of its low-price business model.
The company does not need to offer every possible product.
It needs to offer enough products that members want to keep returning.
Inventory Speed Is Another Hidden Advantage
Imagine two retailers.
One buys $1 million of merchandise.
It takes six months to sell.
The other buys $1 million of merchandise.
It sells in a few weeks.
Which business can reuse its money faster?
Usually the second.
This is called inventory turnover.
The faster products sell, the less capital may remain tied up in unsold merchandise.
Costco emphasizes rapid inventory turnover as a central part of its model.
That matters because retail businesses require enormous amounts of working capital.
Money is constantly moving between:
suppliers,
warehouses,
stores,
and customers.
A company that moves products efficiently can have a financial advantage even when its profit margin on each item is relatively small.
Costco Also Has a Premium Membership
The basic membership is not the only option.
Costco also offers an Executive membership.
In the United States, the Executive tier costs an additional $65 annually above the standard $65 membership.
That makes the total:
$130 per year.
Executive members generally receive a 2% reward on eligible purchases, subject to program rules and an annual limit.
At the end of fiscal 2026, Costco had approximately:
42.3 million Executive memberships.
That represented roughly half of its paid memberships.
Even more interesting:
Executive members accounted for approximately:
75% of worldwide net sales.
That tells us something important.
Costco's most engaged members are responsible for a very large share of merchandise purchases.
The membership program is not just collecting fees.
It is helping organize a loyal customer base around frequent shopping.
The Best Customers May Be Worth More Than the Membership Fee
Imagine two customers.
Customer A
Pays $65.
Visits twice a year.
Spends $200.
Customer B
Pays $130.
Visits every week.
Spends thousands of dollars annually.
Which customer is more valuable?
The answer depends on actual merchandise margins, rewards, costs and shopping behavior.
But clearly, membership revenue is only one part of the relationship.
A loyal customer can generate years of purchases.
That is why membership businesses often focus on:
customer lifetime value.
Not simply:
How much did this customer pay today?
But:
How valuable could this relationship become over many years?
Why Doesn't Every Supermarket Copy Costco?
If membership fees are so attractive, why doesn't every supermarket charge them?
Because charging a fee creates a barrier.
Customers need a reason to pay.
Without a convincing value proposition, a membership requirement could drive shoppers away.
Costco's model depends on several things working together.
Large purchasing volumes.
Efficient warehouses.
Strong supplier relationships.
Limited product selection.
Competitive prices.
Convenient locations.
And customer trust.
Simply charging $65 does not create those advantages.
The fee works because customers believe the system behind it delivers value.
A Membership Is a Promise
This is an important way to understand the business.
When someone pays Costco $65, they are not just buying a card.
They are buying an expectation.
I expect to save money.
I expect good value.
I expect useful products.
I expect this membership to be worth renewing.
Every shopping trip either strengthens or weakens that belief.
And the renewal rate reveals how well Costco has maintained the relationship.
That makes trust an economic asset.
Not just a marketing slogan.
Membership Revenue Is Not Free Profit
There is a common misunderstanding about Costco.
Some people look at membership revenue and assume:
All membership fees are pure profit.
That is not accurate.
Costco has expenses associated with acquiring, serving and retaining members.
It also provides benefits through its membership programs.
Executive rewards are a real cost.
And the company recognizes membership revenue over the membership period rather than treating the entire payment as immediate accounting revenue.
So membership revenue should not be confused with net income.
Still, it provides a valuable and relatively predictable revenue stream.
And it supports the broader retail model.
That is what makes it powerful.
The Most Important Product Might Be the Membership Itself
Think about what Costco really sells.
On the surface:
milk,
eggs,
meat,
electronics,
furniture,
gasoline,
and thousands of other products.
But underneath those products is something different.
Access to a system that customers believe saves them money.
The merchandise gives people a reason to join.
The prices give them a reason to shop.
The experience gives them a reason to return.
And the savings give them a reason to renew.
That is the real business model.
What Investors Should Actually Watch
Costco's membership model is attractive.
But it is not risk-free.
If prices stop being competitive, members may lose interest.
If renewal rates fall, the value of the membership relationship weakens.
If operating costs rise faster than revenue, profitability can suffer.
If expansion becomes too expensive, returns on new warehouses may decline.
And even an excellent business can be a poor investment if its shares are purchased at an excessive valuation.
That is why investors should look beyond total revenue.
They should also understand:
membership growth,
renewal rates,
sales per warehouse,
merchandise margins,
operating efficiency,
and:
the price investors are paying for those future earnings.
A strong business model does not automatically guarantee a strong investment return.
Costco Is Selling Something More Valuable Than Cheap Groceries
Now return to the original question.
Why would a supermarket charge you before you buy anything?
Because Costco is not trying to make the maximum possible profit on every individual product.
It is trying to build a system customers want to use repeatedly.
The membership fee creates a relationship.
The low prices give that relationship value.
The high sales volume supports operating efficiency.
And the renewal rate shows whether customers still believe the system works.
In fiscal 2026, that system generated:
$297.25 billion in merchandise sales.
$5.91 billion in membership fees.
And:
$11.69 billion in operating income.
But perhaps the most revealing number was:
89.8%.
The worldwide membership renewal rate.
Because the real question is not whether Costco can convince someone to pay $65 once.
It is whether Costco can convince that customer:
to pay again next year.
And the year after that.
And the year after that.
Costco doesn't just sell products at low prices.
It sells a reason to keep coming back.
BEYOND THE OBVIOUS.
Sources
Costco Wholesale — Fiscal 2026 Annual Report (Form 10-K)
Costco Wholesale — Fourth Quarter and Fiscal Year 2026 Operating Results
Costco Wholesale — Fiscal 2026 Fourth Quarter Earnings Presentation