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October 3, 2023
Should Costco Raise Membership Fees?
On a quarterly earnings call last week, Richard Galanti, Costco’s CFO, said the question of a membership fee hike was “a question of when, not if.”
Galanti noted that the company’s last price increase was in June 2017, a stretch he described as being “a little longer” than increases implemented by the big-box giant in previous years. The warehouse club typically raises its fees every five to six years.
“You’ll see it happen at some point. We can’t really tell you if it’s in our plans or not. We’ll let you know when we know,” he explained in the earnings call.
“In terms of looking at the values that we provided our members, we continue to increase those at certainly a greater amount than even more than if and when an increase occurs,” he continued. “Stay tuned. We’ll keep you posted.”
The speculation comes as Costco’s business remains healthy, with same-store sales (excluding changes in gasoline prices) in the U.S. climbing 3.1% in the fiscal fourth quarter that ended Sept. 3.
When asked by an analyst about the health of the Costco consumer, Galanti noted that “traffic continues to do very well,” up in the range of 4% and 5% on a year-over-year basis, while renewal rates remain “very strong,” at 92.7% in North America. The fourth quarter ended with 71 million paid household members, up 7.9% year over year.
Galanti added that while weakness continues to be seen in big-ticket items, Costco is faring better than competitors, according to NPD point-of-sale data. He added, “Not in every category, but overall, we tend to do better.”
In June 2017, Costco increased its basic membership cost from $55 to $60, and its executive membership from $110 to $120. When it comes to Costco’s warehouse club competitors, basic membership is $50 at Sam’s Club and $55 at BJ’s.
Among other membership-reliant businesses, Netflix lost about 800,000 subscribers in late 2011 after a bungled attempt to raise the price of the streaming service by about 60%, but it has since recovered.
Amazon faced backlash in 2014 when it raised the cost of Amazon Prime for the first time, but U.S. Prime members have since more than tripled. A Prime fee increase in February 2022 met minor pushback.
Nonetheless, some Costco customers expressed their annoyance on social media upon hearing of the likely membership fee hike.
“The bulk of their profits come through membership fees. And now the greedy overpaid CEO needs to gouge the customer again, even more,” one member wrote on X, formerly known as Twitter.
“I am glad I listen to my kids, it’s starting to get way too costly. I won’t be renewing my membership, good luck Costco,” another said.
Discussion Questions
Do you expect Costco to see a spike in membership cancellations in reaction to an increase in its annual membership fee? Is now the right time to be raising fees?
Poll
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If the basic membership had kept track with inflation, it would now cost almost $76. As such, it is reasonable that Costco makes an increase. Although this also needs to be balanced against the reaction from members. That said, making negative comments on social media is not the same as actually taking action, and I suspect that the very large majority of members are not going to quit over a $5 increase or something of that magnitude.
One has to get up very early to get ahead of Neil Saunders. Raising membership fees is a double-edged sword, and the amount of the increase a big factor. Fortunately for Costco, its membership is loyal so the disenfranchised, will be fewer than if other retailers did th same. Costco has to take inflation into account when making these decisions.
@bob – it’s impossible to beat Neil to the punch! We may have to negotiate with management to get an early preview of the preview! 🙂
Haha. I do get up very early!
Ha! I second the preview idea. Not to beat Neil to the punch, as he’s the strong voice of reason in retail, but for those of us 3 hours behind, west of the Rockies. Getting up at 4:30-5am Pacific to provide commentary with the first wave of retail experts isn’t for the faint of heart.
Based on inflation and cost of living increases since the middle of 2017, I wouldn’t be surprised to see Costco go to $75 for its annual Gold Star membership. A membership increase once every 6-8 years is not unreasonable. I would think they will see a bit of a jump in cancellations, but the reality is that as long as it is a negligible increase, few will balk at paying a bit more. Costco customers perceive quality with their products and will pay the price.
Costco is doing well, including reports of increasing its “fashion” business. So, members are buying more than paper towels and water. Most Costco customers realize that part of their membership dollar buys them the services of Costco’s exceptional product curation—and prices—compliments of its merchandising team.
Timing is everything in this world. Costco has thus far differentiated itself from other retailers who give us shrinkflation and inflation.
if it was my company, I’d wait until people could better afford it.
Costco is a juggernaut and a reasonable price increase will do little to sway their customer base. If, of course, they raise membership fees in the vane of what Netflix tried to do, they’ll see some attrition, but I don’t see that happening.
There is never a “right time” for raising fees, from a shopper’s perspective. However, timing is important. Announcing a $5 increase now that takes effect after the holidays would make it sound like Costco is giving members a gift and would soften the blow. They could even offer members to pay the existing rates now and extend their membership another year if they want to lock in more shoppers.
Costco has not raised its membership rates in 6 years, and Amazon has had two price increases of $20/year during this period ($99-$139). When you put a potential price increase for Costco into perspective, they are overdue for a price hike. Costco members are some of the most loyal customers in retail. I don’t think a small $5-$10 price increase will have much impact on their membership base.
Anybody grumbling about a membership fee increase is probably not a frequent shopper. Some pretty simple math demonstrates that the fee pays for itself in just a couple of shopping trips. Costco membership and Amazon Prime are the best values in all of retail…by far.
Half the value I get from my Costco membership is the price savings. The other half is the entertainment value. Their prescription service is also a great benefit, but you don’t need a membership to use that. As a 2-person household we are not a fan of Amazon. On rare occasion that we need to buy something on Amazon my daughter-in-law is a member and can get it for us. I often find bargains on eBay.
Every company that raises rates has pushback from customers. It’s inevitable, and they may be vocal about it on social media, but it doesn’t always mean they will cancel their membership. It’s all about perceived value.
Costco membership makes sense for my daughter because she buys in bulk for her family, as an empty nester it doesn’t make sense for me. I don’t shop Costco often but I keep my membership because I like the store and its services. I am betting there are a lot of shoppers out there like me who will keep renewing, regardless of a price hike.
Actually, while every membership price hike is accompanied by cancellations, I wouldn’t expect a major defection. Of course, it depends on how you look at the numbers. If you look year-to-year for the month following an increase announcement you will see a “spike”. If, on the other hand, you look at the whole picture I think Costco will weather the storm quite nicely. As to whether or not now is the time to raise membership fees, from as member’s perspective that time never comes.
Raise the price by 10% and lose 2% of the members. Do the math. It’s a no brainer for Costco. And a lot of that 2% will likely come back after a few months. I have never had to use the Costco credit card former extended warranty benefit but I would still be willing to pay a modest, membership increase for it.
Now is probably the right time. They are very healthy and can survive a little, temporary dip, if one occurs. It is important to realize that the price hikes customer impact is spread across a 12 month period, (based on their renewal month) and the majority of the time the customer is asked for renewal they have a full cart at checkout and are going to say “yes”. The bigger question is “how much?”, assuming they want to wait another 5 years for the next one?
I can’t imagine anyone would be surprised if Costco raised its membership rate. Costs of almost everything are increasing. The value Costco provides members should more than makeup for the nominal increase in an annual fee. I would anticipate minimal fall-out or cancelations.
I expect Costco will announce a smaller than average increase, and with the backdrop of all kinds of much larger price increases throughout the industry there will be barely a blip in cancellations. Costco membership is one of the highest values available. That the last increase was 7 years ago is a statement all to itself.
A slight raise in membership is a small price to pay for the value the membership offers. Just for a quick example. I wear hearing aids. Costco beat everyone’s price for equivalent hearing aids by over a thousand dollars for a pair.
I don’t think raising the fees will have much of an impact – on customers, that is, it certainly might for Costco itself if they are truly the source of “the bulk of profits” as the article claims – but I can’t help but think an opportunity is being missed by not raising them (even it’s just for a year or so). When you have an almost cult-like following you have latitude, but it’s good to remember why you have that following in the first place.
Although, I agree with Paula, sometimes you cannot stop when a cost increase in warranted.
I have been a Costco customer for years, and I have always felt the membership was always very value added, but sometimes you have to pass an increase on unfortunately at a bad time.
Raising prices is always “when, not if”. Anyone with credit cards or loans with increasing interest rates is feeling a pinch, and emotions are stronger around price increases.
Costco has a good case for a small membership fee increase. Although someone on social media is angry at the “greedy” CEO, Costco continues to offer good value. Their product quality and customer service is strong, stores are clean, the experience lives up to the billing. If any place is needed for American consumers right now, in this economy, it’s a healthy operating Costco.
Combining a membership increase with an announcement of another value-add service offering just for members would be a way to take some of the sting off a price increase.
Costco has built up such a loyal following that a reasonably small increase should have little to no effect on membership.
Costco’s members are loyal for a reason: when you have a family you are feeding and clothing, the membership is basically an automatic renewal because members know how phenomenal the prices are. I just purchased a cold medicine last night with 56 tablets for $23 at Costco, and the exact same branded medication was $19.99 for 16 tablets at the neighborhood grocery store. Any sort of negative social media reaction is going to come more from the occasional shopper than the regular Costco shopper who understands that they have more than paid for their membership many times over in the savings over other stores.
I’ve been a long-time Costco customer, and genuinely think that they are an excellent place to shop. Anyone who has been a member at Costco would know that the value received on their membership is far more than what you pay for it.
However, every time a company decides to raise the prices of their offerings, or in this instance the membership fee, customers may exhibit a certain level of unhappiness. Consequently, it becomes crucial for a company to look at certain considerations before moving forward with a decision; such as its financial position, competitive analysis, and whether or not its members would receive any additional value.
From Costco’s perspective, it is important that they maintain transparency and communicate with their customers about why they are raising the fee. Finally, they must demonstrate that the fee increase is justified and that customers will continue to receive a fair value for what they ultimately pay.