Why Costco Charges You Before You Shop

Most retailers compete by making it easier to walk through the door. Costco does the opposite: it charges you an admission fee before you can buy a single product. A basic Gold Star membership costs $65 a year in the United States, and an Executive membership costs $130. Without one, you generally can't shop there at all. That upfront fee isn't a side effect of Costco's low prices — it's the mechanism behind them.

The obvious explanation is scale. Costco operates hundreds of warehouses worldwide, buys in enormous volume, and turns inventory over quickly enough that little money sits idle on a shelf. Private-label lines like Kirkland Signature push those advantages further, since Costco controls production costs directly instead of paying markup to an outside brand. That's a real part of why so many products are inexpensive.

It doesn't explain the membership fee itself, though.

For fiscal year 2024, Costco reported about $4.83 billion in membership fee revenue, tracked separately from merchandise sales. By fiscal year 2025, that figure had grown to $5.32 billion — just over half of the company's entire operating income of $10.38 billion for the year, spread across roughly 81 million paid members and 145 million total cardholders worldwide.

That money arrives before any shopping happens. A customer pays it whether the cart ends up holding one television or twenty, or nothing at all.

A typical retailer earns its profit one transaction at a time, so every visit is a fresh chance to raise margins. Costco works differently: it caps its own markup at roughly 14 percent on branded goods and 15 percent on Kirkland Signature products — far below what's standard elsewhere in retail.

That cap only makes financial sense if the company already has another source of income to lean on — and part of that income has already arrived before a member's cart is ever filled.

The Executive membership adds another layer. It costs $65 more than the base Gold Star membership, and in exchange, members get back 2 percent of what they spend at Costco, up to $1,250 a year.

Spend about $3,250 a year, and that 2 percent already covers the extra $65. Spend more than that, and there's a real financial reason to keep renewing: walking away means giving up money already earned back.

The core mechanism — charge for access, then use that revenue to justify thinner margins on everything else — has held up for close to fifty years.

Sol Price opened the first warehouse club, Price Club, in San Diego in 1976. Jim Sinegal, who had worked for Price earlier in his career, opened the first Costco warehouse in Seattle in 1983 with Jeff Brotman, adapting the same idea and opening membership to individual shoppers as well as businesses. The two companies merged in 1993.

Costco reports renewal rates above 90 percent worldwide, and above 92 percent in the US and Canada — numbers that get real attention in the company's investor materials, because a renewed membership is a year of revenue locked in before that member sets foot in a warehouse again.

A typical Costco warehouse stocks a narrow, curated selection compared with a typical big-box store, and that narrow selection, along with the oversized packaging, the constantly rotating inventory, and the $1.50 hot dog and soda deal that hasn't changed in decades, all reinforce the same promise: membership should feel worth it every time a member walks in. Buying in bulk makes those things possible, but recurring membership revenue is what makes them worth doing consistently, since raising prices to boost merchandise profit would also give members a reason to question the annual fee.

Costco isn't alone even inside its own industry. Sam's Club charges $60 a year for its base Club tier and $120 for Plus, which adds 2 percent cash back capped at $750 a year. BJ's Wholesale runs a similar split — a base Inner Circle tier and a pricier Perks Rewards tier with its own 2 percent cash back. Three separate warehouse chains landed on the same two-tier shape on their own: a cheap tier for basic access, and a pricier tier that pays part of itself back to the highest-spending members.

The same underlying idea shows up well outside retail too. Amazon Prime collects subscription revenue before most purchases happen, which gives Amazon an incentive to increase how often people shop rather than maximize profit on any single order. Software companies like Microsoft and Adobe have shifted from one-time purchases to subscriptions for a similar reason: keeping a customer renewing is worth more than extracting the most from any single sale. Streaming services and gyms work the same way, treating the subscription itself as the product and everything after it as the reason to keep paying for it.

Gillette is often cited as an early version of this same idea — pricing razors low to start the relationship and letting replacement blades sustain it. Worth flagging: the specific story of Gillette deliberately selling razors at a loss to lock in blade sales is a widely repeated business-school anecdote, not a well-documented historical fact — several retail historians dispute it. It's included here as the popular reference point it is, not as a verified claim, so it isn't linked to a source the way the numbers above are.

It isn't a model every business can use. Luxury brands rely on scarcity rather than repeat subscriptions, airlines price around shifting demand, and grocery stores without memberships compete on location and convenience instead. It works for Costco specifically because its customers shop there repeatedly throughout the year, and the membership fee ties those visits into one ongoing relationship instead of treating each trip as separate.

If you've ever noticed that the Kirkland version of almost everything on a shelf costs less than the name brand sitting next to it, the 15 percent cap is a real part of why. You aren't stumbling onto a lucky discount. You're looking at a ceiling Costco set on itself — one it can afford because you already paid to be there.

So you pay Costco before you buy anything, and the reason isn't really about admission. The fee is what lets Costco run the rest of the business differently: a 14 percent cap on markup instead of 25, in exchange for a customer who already has a reason to come back next year.

Sources

Sources cited above are linked inline.