There are many positives that can be drawn from the way that Costco runs and controls its business. Costco’s motto is “To continuously provide our members with quality goods and services at the lowest possible prices” (Thompson, Strickland, Gamble, 2010). They have stuck to this mantra by providing affordable memberships to its customers, and affordable pricing of its merchandise. Costco’s strategy of low pricing and limited product line and selection made Costco successful by keeping their margins below their competitors; this is a positive in that it will draw more customers and more accounts for the growth and prosperity of the business.
Costco’s limited product line and selection is also a positive because unlike it competitors, Costco offers efficiency in its sale process and makes it easier for the business to be managed. Sinegal stated that “If you have ten customers in to buy Advil, how many are not going to but any because you just have one size? Maybe one or two, we refer to that as the intelligent loss of sales” (Thompson, Strickland, Gamble, 2010). Another positive is Costco’s approach to treasure-hunt shopping.
Costco tries to intrigue its customers by creating a sense of urgency with certain products that are high-end and that the company knows will sell-out quickly. Although these items a lot of times are higher priced, they still are reasonably lower than the average department store or its membership warehouse competitors. The only negative would be Costco’s marketing and advertising strategy. Although the stores reputation and low pricing have constituted in the franchises high level of success, their marketing strategy is lacking some key elements.
Costco believes that direct mailings was the best possible marketing and advertising strategy but are missing out on the possibility of gaining a higher number of customers due to their lack of internet presence. The key factor that comes to mind is that Costco doesn’t offer a list of their store items online, which doesn’t give a consumer who isn’t familiar with the store a chance get the full spectrum of what they truly offer. Although Costco 3 Costco is a large franchise, in most cases; word of mouth simply won’t get a business the clientele they truly need to be successful or a leader in their respective arena.
There were two strategic elements utilized by Costco that were insightful, the first being how Costco developed its personnel from within. The case of Jim Sinegal comes to light. When Sol Price made Jim Sinegal the manager of the original Price Club, he knew that Jim had a special knack for discount retailing and for spotting what a store was doing wrong (usually either not being in the right merchandise categories or not selling items at the right price points) very things that was good at and that were at the roots of Price’s Club growing success in the marketplace (Thompson, Strickland, Gamble, 2010).
Sinegal applied this same concept when he partnered with Jeff Brotman, who was the elevated to vice chairman in 1993 and then to chairman in 1994. This strategic element is what made both Price Club and Costco very successful. The second strategic element that was insightful was the way in which Costco formulated its strategy on low prices and its limited product and selection. Costco’s view of the intelligent loss of sales, proved viable because they were willing to lose one or two customers to capture a higher number of clientele in the long run, and adhering to this strategy makes their business efficient and profitable.
The formulation of strategy must take into consideration important external parties. For Costco, the competitor and their targeted customers were two constituencies. How was their strategy influenced by these parties? Did their strategy reflect adequate consideration of the needs of these two groups? Costco’s strategy was definitely influenced by its customers and its competitor. From a competitor’s standpoint Costco wanted to a provide services, prices, and products that rivaled its competitor Sam’s Club.
Costco’s combining of high quality and low prices id the driving for behind Costco’s success. It is evident that Sam Walton, with Wal-Mart and Sam’s club played an integral part in the way the Costco has devised its strategy. Costco’s average pay, for example, is $17 an hour and is 42% higher than its fiercest rival Sam’s Club. Costco’s health plan also makes other retailers look Scroogish, Costco’s workers were only paying just 4 percent toward their health costs and raised it to only 8 percent when Sam’s Club and the retail average is at 25 percent (Bowmer, 2007).
Costco isn’t simply looking to be better that the competition they want Costco 4 to be demonstrably better,” said John Matthews, Costco’s senior vice president for human resources (Bowmer, 2007). From the customer’s standpoint Costco looks to keep increasing its consumer base by providing low prices that aren’t coming at the workers’ expense, they believe this is the key to providing a good service and good business as a whole. Costco caters to the customer, by not becoming a casualty in the pricing war among retailers and wholesale club industries alike.
A cardinal rule that has been implemented is that no item can be marked up by more than 14 percent and no private label item by more than 15 percent. In contract supermarkets generally mark up merchandise by 25 percent and department stores by 50 percent (Bowmer, 2007). Costco strives to be good merchants and offer the greatest value to the customer, Costco constantly strives to figure out how they are going lower their prices while their competition looks for ways to get to get more money for their items.
Costco has a good understanding of its customers and knows that they don’t gain clientele by having fancy displays and mascots etc… they know that the values they have attract and keep customers coming back, as well as attract new prospects. The company’s knack for adjusting and seeing things in a new way explains how Costco’s customers influence on the decisions and strategies set forth by the company. Costco’s strategy reflects adequate consideration of its customers and capitalizes on the needs that its competitors have.
One can draw this conclusion because Costco has diagnosed what the customer needs, values and wants from a proprietor, and also have evaluated what the competition is lacking and perfected their mantra of providing low prices and quality products and services. They have formulated strong objectives that benefit their workers, customers and shareholders, and strategized a plan to be more successful than the competitor with a business model than can be considered overly generous in regards to its customers and workers in comparison to the competition.