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Costco's Great Pricing Strategy and Business Model

By Anthony Taylor - June 10, 2015

Great strategies are all around us. As a business enthusiast, I love to see companies that take risks and put bets on things that will make an impact on their bottom line in both the short term and long term future.

This month there were two news stories that covered Costco's business model and their strategy for growth. First was the case study on using roast chickens and hot dogs as loss leaders to get people into the store. Despite the fact they could make millions more by increasing the price to match inflation, they chose to keep their prices where they are because it's better for business. Considering they sold over 76 million chickens last year, that's a lot of clucking money.

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The second, and more impressive of the two articles, was that Costco sold over 400,000 cars in 2014 and might be eyeing to be the market leader in the US (No. 1. car retailer AutoNation, sold 533,000 vehicles last year," according to Bloomberg.) 

They were able to do that because of negotiated pricing with suppliers (which is one of their core strengths) to be able to provide pricing below MSRP.

Another huge value to consumers is that their pricing is fixed so consumers don't have to haggle or negotiate. This reduces friction in the sale and reduces the overhead (see: sales people) needed to serve those customers.

I don't know if Costco knew that they were addressing a major pain point in the market with their car strategy, but the next time you pop in to buy a chicken you might end up leaving with a sedan.

 

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