How Costco Makes Money From MembershipsThe Fee at the Door 19 October 2026 · 11 min read · 227 reads
Business · Money · Retail
How Costco Makes Money From Memberships The Fee at the Door
In fiscal 2025, Costco's membership fees were larger than its profit from selling goods. The numbers, from its own annual report.
Imagine a shop that sells you a 24-pack of something for less than your local store charges, and earns very little on the sale. And yet the owners are happy. How?
The answer is at the front door. Before you pick up a
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single
item,
you
have
already
paid
to
walk
in.
That
is
Costco,
the
American
warehouse
chain,
and
I
wanted
to
see
how
much
of
its
business
really
runs
on
that
entry
fee.
Costco
is
a
public
company,
which
means
it
has
to
publish
detailed
annual
reports.
So
for
once
I
did
not
have
to
guess.
I
read
the
numbers
in
its
annual
report
for
fiscal
year
2025,
which
ended
on
31
August
2025
(the
filing
is
called
a
10-K).
I
did
some
simple
arithmetic
on
them
and
I
will
show
my
working,
so
you
can
check
it.
The business in one paragraph
Costco sells goods in big warehouse stores, and you need a paid membership to shop. In the annual report, the company says it had 914 warehouses at the end of fiscal 2025. It had 81.0 million paid members, of which 38.7 million were "Executive" members, who pay more for an upgraded membership. The total number of cardholders, including family members on the same account, was 145.2 million. In the US, the basic annual fee is $65, and the Executive upgrade is an additional $65. The filing says Costco raised its annual fees in the US and Canada from 1 September 2024. It does not list the new amounts in the part I read, so I am using only the $65 figure it states.
The company also keeps its range narrow. The filing says a warehouse carries fewer than 4,000 active stock keeping units, which is a fancy phrase for "different products." The filing says its website averages 9,000 to 10,000. And the company says its own Kirkland Signature products are a growing portion of its sales, though it does not give a percentage in the part I read.
The numbers that tell the story
Here are the figures from the report, in millions of US dollars. Net sales, which is the money from selling goods, were $269,912. Membership fees were $5,323. The gross margin, meaning what Costco kept from sales after paying for the goods themselves, was $30,026. That is 11.12% of net sales. The report also gives selling, general and administrative expenses, or SG&A, which covers staff, rent, electricity and everything else it costs to run the warehouses. That was $24,966, or 9.25% of net sales. Net income, the final profit after everything including tax, was $8,099.
Now my arithmetic. If you take the money Costco kept from selling goods, $30,026, and subtract the cost of running the business, $24,966, you get $5,060. That is about 1.9% of net sales. In other words, from selling goods alone, after paying its running costs, Costco kept roughly two cents on each dollar.
Compare that with the membership fees: $5,323. The fees were bigger than the profit from selling goods.
Add them together and you get $10,383, which is what I make Costco's operating profit, before interest and tax. The fees were about 51% of that. So "most of its profit comes from memberships" is not quite right, based on these numbers. It is about half. But half is still a very large share for a line of income that has nothing to do with what is in the trolley.
Two sources of operating profit, fiscal 2025
Goods, after running costs5,060 US$ million
Membership fees5,323 US$ million
Why this changes how the store behaves
Think about what the numbers mean for the shop's choices.
If a store makes most of its profit on goods, it wants the highest mark-up customers will accept. Costco's profit from goods is thin, so it has less reason to push prices up and a stronger reason to keep shoppers happy enough to renew. This part is my reasoning, not something the report states. The report says the membership format is "integral" to its business and profitability, and that membership growth and renewal rates "materially influence" profit.
Renewals are the key. The report puts the renewal rate at 92.3% in the US and Canada and 89.8% worldwide at the end of fiscal 2025. It says the worldwide figure is a little lower partly because memberships sold online, including through digital promotions, renew at a slightly lower rate. So out of every 100 members, about 90 to 92 sign up again. If that rate fell by a few points, the effect on income would be large, because the fee is the foundation under everything else.
The fees are also recognised gradually. The report says they are counted evenly over the one-year membership period, not all at once when you pay. So the money does not hit the profit and loss account in one go, but the cash comes in up front. That cash arrives before the goods are sold, which helps.
A fee increase and what it did
The company raised fees from 1 September 2024. Membership fee income rose from $4,828 million in fiscal 2024 to $5,323 million in fiscal 2025, a rise of $495 million. The report says the rise came from both new sign-ups and the fee increase, and attributes about 40% of the growth to the fee increase. At the same time, paid members grew from 76.2 million to 81.0 million, so people did not leave in large numbers after the higher price.
That is an important point for anyone running a membership. A price rise is easier when your members are happy. The renewal figures suggest that for Costco, at least in this one year, they were.
The narrow range fits the story. Fewer than 4,000 products per warehouse means each product sells in big volume. Big volume helps Costco negotiate with suppliers and keeps its running costs low. Its running costs of 9.25% of sales sit only a little below its 11.12% gross margin, so there is not much room for waste. A narrow range also gives shoppers fewer choices, which some people like and some do not.
I want to be careful with one popular claim. You will often read that Costco caps its mark-up at a fixed percentage on every item. I could not find that in the annual report I read, so I am not repeating it. What the report does show is the result: a gross margin of 11.12% on sales, which leaves little room once running costs are paid. I have not compared it with other retailers, so I will not call it low or high.
What the warehouse itself is like
Costco describes its own strategy in short phrases. The report says the company offers "low prices on a limited selection" of nationally branded and private-label products, aiming for high sales volume and fast inventory turnover. It says it aims for prices it believes are "consistently lower than elsewhere." In a later section on results, it adds that it does not focus in the short term on maximising the prices it charges.
The building is part of that. The report calls the warehouses "no-frills, self-service" and "not elaborate." The average size is about 147,000 square feet. Goods are shown on pallets, and extra stock is stored on racks above the sales floor, so the shelf is also the storeroom. Large supplier shipments go to cross-docking depots, which are places where goods are moved from incoming trucks to outgoing ones without sitting in storage, and then on to warehouses. The report says its shrinkage, meaning goods lost to theft or damage, is "well below" typical retail levels.
Costco's own Kirkland Signature brand sits in the same logic. The report says these products are high quality and generally priced lower than national brands. It does not give their share of sales, as I said earlier.
The scale is large. The company says it had 341,000 employees at the end of fiscal 2025. It operates warehouses in 15 markets, including the US, Canada, Mexico, Japan, the UK, Korea, Australia, Taiwan, China, Spain, France, Sweden, Iceland and New Zealand, and the list also includes Puerto Rico. It also had 747 gas stations at the end of 2025, and gasoline was about 10% of net sales. E-commerce was about 7% of net sales. So a warehouse visit often includes fuel, and a small part of the business is online.
One sentence in the report caught my attention. It says: "We often sell inventory before we are required to pay for it." Costco's high turnover means that goods can be sold before the supplier has to be paid. The report adds that it takes early payment discounts where it can.
If you have never thought about this, here is a plain example, illustrative only. Suppose a shop gets a pallet of goods and has 30 days to pay for it. If it sells the whole pallet in 10 days, it holds the customers' money for 20 days before handing it on. The shop can use that cash in the meantime. The report does not give the supplier payment terms, so I cannot say how long Costco's gap is. But the sentence tells me that the speed of selling is part of the money story, as well as the margin.
The membership comes with an extra layer. The report says the Executive member earns a 2% reward, generally up to a maximum of $1,250 a year. That is a clear example of how the plan works for the customer: the more you spend, the more you get back, up to a ceiling. For the company, the upgrade adds a second fee, which means 38.7 million members have paid more than the basic amount. The report also gives certain electronics a 90-day return policy. I think a clear return policy makes a membership feel safer, though that is my reading.
Two more bits of arithmetic
Here are two more calculations I did, so you can see how lopsided the model is. Both are rough, because membership fees differ by country and the report spreads them over the year.
First, total revenue is net sales plus fees, about $275,235 million. The fees of $5,323 million are only about 1.9% of that revenue. Yet they are about 51% of operating profit. A small slice of the money coming in carries a big share of the profit, because almost nothing is spent to earn it.
Second, if you divide fees by paid members, you get roughly $66 per paid member. If you divide net sales by paid members, you get roughly $3,300 in goods per paid member per year. (This is a crude average, since cardholders include family members and members join at different times.) So a typical paid membership brings in a small fee, and a much larger flow of goods on thin margins. Both parts matter. The shop needs the goods flow to justify the fee, and the fee to justify the thin margin.
What can go wrong
The model is not without risk, and I want to be fair about it.
It relies on trust. Members pay up front because they believe they will save more than the fee costs. If they stop believing that, renewals slip, and renewals matter a great deal.
It relies on volume. The thin margin works because so many people shop. A fall in visits would hit hard.
It relies on a narrow range staying attractive. If shoppers want more choice, or can get similar prices elsewhere, the advantage shrinks.
And the report covers one year, which is a short window for a business that depends on trust built over many years. I did not check earlier years or competitors here, so I cannot say whether this pattern is stable over time.
What this means for a small business
You do not need a warehouse to use the idea. The core is: if you can get your customer to pay a fee for access, your income no longer rests only on each sale. That lets you price the sales more fairly.
Some examples to think about. A gym, a magazine, a software tool, a club: all earn from the relationship, not each visit. A small shop could offer a paid membership with a clear benefit. A service business could offer a monthly plan that guarantees availability.
But I would check three things first. Does the member get a benefit that clearly beats the fee? Is it easy to see that benefit every month? And will I keep the promise even when it costs me something? Costco's renewal rate suggests that the answer, for its members, is yes. Yours has to earn the same.
What I take from this
It is easy to assume that a low-margin shop must be struggling. After reading the numbers, I see Costco as a business with two engines: one thin, one steady. The thin one, selling goods, draws people in. The steady one, membership, pays for the promise. I am trying to ask of my own work whether I have one engine or two, and whether the second one rests on real trust.
Try this week: Pick a business you run or admire. Write down every way it earns money. Then ask which of those would still pay if sales dropped for a month. That is your steady engine. If you do not have one, write down one idea for building it.
Sources
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