Costco charges members to shop and caps markups — profit comes from fees, not margins

In 1983, Jim Sinegal — a former Price Club executive — and Jeff Brotman opened Costco's first warehouse in Seattle, betting on a model that inverted retail's profit logic. Competitors made money by marking goods up 25–50%; Costco would charge customers a membership fee to walk through the door and cap what it earned on the goods themselves. Price Club had proven membership warehouses could work for businesses; Costco's idea was to make the fee — not the merchandise margin — the engine of the company.

Execution was deliberately rough: no-frills warehouse stores, ~3,700 SKUs on pallets (supermarkets carry 40,000–50,000), limited brand choice, and a public ceiling of about 14% markup on national brands and 15% on its own Kirkland Signature. Sinegal refused even small price increases, calling the temptation 'the business equivalent of taking heroin' — once you normalize raising prices, you are no longer the low-price leader.

The model produced numbers other retailers could not match: by 2018, 51.6M members paid $3.14B in annual fees with a 90% renewal rate; merchandise gross margins hovered around 11% while the rest of retail ran 25–50%; by fiscal 2024 revenue approached $250B and renewal hit 92.8%. Costco merged with Price Club in 1993 and grew into the world's largest warehouse club, its $1.50 hot dog unchanged for decades as the symbol of the promise.