Costco’s secret isn’t just oversized jars of cashews

A working paper by Michael Norton and Leonard Lee of Harvard and Columbia argues that what budget-minded customers Costco shoppers behave irrationally in response to the store’s membership fees. Shoppers attribute Costco’s low prices to its membership fee – regardless of whether Costco prices for an individual item are indeed lower than competitors like Wal-Mart – and try to capitalize on them by buying more than they otherwise would. In other words, people infer a savings at a store like Costco that goes beyond the larger volume products. And because Costco members must show their identification each time they enter the store, they are reminded of their membership fee, spurring overconsumption with each visit. The abstract is below:

Many consumers have had the experience of entering discount membership clubs to make a few purchases, only to leave with enough pasta to outlast a nuclear winter. We suggest that the
presence of membership fees can lead consumers to infer a “fees to savings” link, spurring them to increase their spending independent of the actual savings afforded by such clubs. Using both field data and studies in which we created our own “membership clubs,” we show that 1) fees serve as a signal of price discounts, such that stores that charge fees are perceived as offering better deals for identical items; 2) the presence of fees can increase consumer spending and overall store profitability; and 3) the presence of fees can drive choice of retail outlets, such that stores with membership fees are more popular even when they offer the same goods at the same prices as stores without fees.

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One Response to “Costco’s secret isn’t just oversized jars of cashews”

  1. Pete W Says:

    Costco deals:
    *toilet paper
    *paper towels
    *milk
    *eggs
    *almonds

    not so hot:
    *boxed cereal
    *grapes

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