Customer Love Story: Costco

This retailer pays employees well and rewards shareholders with above-market performance. The secret: It’s all about the customer.

By Fred Reichheld, Maureen Burns, and Darci Darnell

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This article originally appeared on LinkedIn.

Members first at Costco

Not long ago, I had the opportunity to meet Jim Sinegal, the cofounder and former CEO of Costco, when he was in Cambridge, Massachusetts, meeting with MIT Sloan professor Zeynep Ton and her students. Along with Amazon, Costco is the retailer with the strongest NPS, and as a loyal customer myself, I couldn’t wait to ask Jim about his philosophy.

What makes Costco so special?, I asked. “Culture is our most important asset,” he answered. “It’s based on doing the right thing. Put yourself in the member’s shoes. Be fair.”

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Costco prospers by doing the right thing in part because of the company’s membership model. Annual membership fees essentially lock in the retailer’s required profits at the beginning of each year. With that foundation in place, every subsequent decision can be made with an eye toward maximizing Customer Love.

Here is an example Jim shared in Professor Ton’s classroom. It’s in two chapters. Chapter one: Costco’s buyers negotiated a great deal on Calvin Klein jeans. Following its long-standing policy of marking up everything 14% except its private-label Kirkland brand, which gets marked up 15%, Costco priced the jeans at $29.99. Since they were priced at $59.99 elsewhere, they sold fast.

Chapter two: Costco learned that an additional 1 million pairs of jeans had become available when a foreign buyer’s letter of credit failed. This time they got an even lower price and sold the jeans for $22.99. Why not price this new lot at least at $29.99 and keep the extra $7 per pair to boost profits? Costco’s 14% policy has several benefits. It minimizes complexity in running the stores. It also earns the trust of customers, who can rely on Costco to never play games. Once you start making exceptions, Jim explained, you can’t stop. “It would change the whole nature of the company,” he told the classroom.

Customer Love highlight of the week

Since this edition is about Costco, I’ll share one example—of many—of the behavior that’s kept me coming back for more and recommending the company to my friends and family. Like many people, I bought a fire table in preparation for outdoor socializing during the Covid-19 winter. I got a good price at Costco but, a month later, noticed it had dropped by $150. I went online and requested a $150 credit, which Costco issued within a few days. That’s love in action.