Q. How does Costco make any money when its stuff is so cheap?
The vast majority of Costco’s profits come from membership fees. The company makes a small profit on product sales, but various estimates peg the profitability ratio at around 80% membership fees versus 20% product profit.
This makes sense as Costco’s value proposition to its customers is that by paying the annual membership fee, the customer will get big discounts on all the items in store. Therefore, Costco should be able to undercut other retailers on price per item because its profitability mostly comes from the membership fees that other retailers don’t charge.