Costco can make its web site profitable more quickly than many others if it sticks to certain tactics:

a. Keep the assortment profitable (margins must be high enough to pay for themselves) by not requiring the assortment to be the same as the store assortment

b. Show great value (savings) online

c. Minimize new online customer acquisition cost. Only publicize the online store to Costco members using store materials and the Costco magazine. Avoid non-Costco marketing channels.

The challenge for Costco is going to be expanding beyond their current customer base. As a Costco member, I receive e-mails telling me of special deals and products. Non-members are less familiar with the online store. They need to effectively promote the site.

It’s a perfect tool to help them further their expansion. With all of the orders requiring a ship to address, it gives them another tool to identify areas where a new store could be located. This is a similar approach used by department stores in the old days when they all had their own credit card operations.

I love the focus of the Costco site. Clear and direct; it’s out to sell you something. And the stuff it’s selling is higher-end and highly competitive price-wise.

Costco is coming out of the closet with their website, finally admitting what most of us intuited all along: They’ve got a line on good prices on good stuff. No preponderance of Chinese imports here. They’re a club, and they take that appellation seriously. Club members look out for each other.

The website also becomes a force multiplier by featuring items not generally found in the stores. In this way, they magnify the appeal of discovery shopping — a concept they learned from Waccamaw Pottery in Myrtle Beach.

The challenge for the Costco website will be to maintain focus as they become more successful. Amazon fights this demon every day, because they can legitimately suggest a huge number of related additional purchases for most visitors. Yet they maintain fairly good control over their presentation — which is saying a lot.

Mark Lilien – would love to hear more about why you think Costco should not try to acquire nonmembers. The website charges a 5% surcharge to nonmembers, which both gives those frequenting the online store a reason to become Costco members as well as likely boosting margins into the same range or better than when members use the site. The information gathered from nonmembers can be critical marketing and planning info, as Mark Hunter suggests.

The very low overlap between the retail and online stores is a very interesting strategy. It takes advantage of the very real differences in consideration for carrying a product in the store vs. online, avoids decreasing store visits (keeping impulse buys high) and it creates an expanded universe of products for Costco members.

I do think they could do marketing, to both members and nonmembers. More in-store signs for non-competitive product categories, and perhaps an in-store kiosk.

Costco Online is a wonderful retailer albeit one thing: shipping/handling costs. Since it follows the traditional Costco business model of 14% markup, there is little room for shipping costs and everything is passed on to consumers. If one buys one or two items costing below $10, the shipping cost is probably 50% of the purchase. Unless one is home bound, one is likely to go to the store and shop and save the shipping costs accordingly, not to mention one can also shop for many more items. Amazon.com has been subsidizing shipping costs, thus eating into its profit margin. However, the Amazon portal is doing business in the billions of dollars. Inevitably, Costco Online sells top quality merchandise and has the same return/exchange policy as buying in the stores. Consumers find this extremely assuring, since returns/exchanges can be done in stores. Unlike many online business portals, exchanges or returns are very cumbersome. My personal feeling is that if Costco can find some ways of lowering the shipping/handling costs, sales will go through the roof. Jim… Read more »