Most people think they understand Costco. The prices are low, and the membership is simply the price of admission: pay at the door, shop at cost, and come out ahead on bulk paper towels. It’s a tidy explanation. It also gets the causality backwards.

In fiscal 2025, Costco earned $5.3 billion in membership fees against $10.4 billion in operating income. Slightly more than half of the company’s operating profit came from a fee, not from selling anything. The merchandise business — all $269.9 billion of it — runs on a deliberately thin margin, and the fee is what makes that possible. The membership isn’t the toll at the door. It’s the product.

What members buy with the fee

Costco’s gross margin in 2025 was 11.12 percent. For every dollar a member spent, about 11 cents remained after Costco paid for the goods. Walmart, which has built much of its identity around low prices, reported a gross profit rate of 24.2 percent for its fiscal 2026. Costco keeps less than half as much from each dollar of sales.

That isn’t an accident of scale. Costco’s own annual filing describes it as the plan: low prices on a deliberately limited selection produce high volumes and fast inventory turnover, allowing the company to “operate profitably at significantly lower gross margins … than most other retailers.” Costco has also said for years that it caps markups at 14 percent on branded goods and 15 percent on Kirkland Signature products. (That specific rule doesn’t appear in an SEC filing, so treat it as stated company policy rather than a filed figure.) Still, the reported gross margin makes the underlying discipline hard to dispute.

So what does a member buy for $65 a year? It isn’t a discount. They’re hiring a purchasing agent that has publicly given up its own incentive to mark things up.

Where the profit comes from

Costco generated $5.3 billion in profit from membership fees — representing 51 percent of their operating profit. It comes out to about $66 in fee income for each of Costco’s 81 million paid members. Set the fee income aside, and roughly $5.06 billion of operating income remains against $269.9 billion in net sales: an operating margin under 2 percent.

That’s a rough subtraction, not a claim about what Costco’s cost structure would look like without a membership base. But it does show where the profit lives.

Put those two lines together, and the business starts to look different. The warehouses aren’t a profit center with a membership program bolted onto the side. They’re the reason more than nine in 10 members decide to write the check again next year.

Costco doesn’t sell memberships to get people into the store. It runs the store to make the membership worth renewing.

Most retail loyalty programs have the opposite arrangement: the program exists to improve the economics of the merchandise business. At Costco, the merchandise business exists to protect fee renewal. That inversion is what makes the model so interesting — and what makes it much harder to copy than it first appears. You can add a fee to any store in an afternoon. The fee alone changes nothing.

Why the fee makes low prices possible

A store that lives on merchandise margin has to want a higher markup, because markup is where its profit comes from. It can promise low prices, and it can mean it sincerely, but the economic incentive still pulls in the other direction every quarter. Customers understand that tension, even when they can’t see the spreadsheet behind it. That’s why “everyday low prices” needs to be advertised over and over again to stay believable.

When the profit moves into a fee, the incentive moves with it. Costco grows when more people renew, and people renew when the prices continue to feel unusually good. Keeping prices low stops being a sacrifice and becomes the profitable choice.

The promise is structural rather than promotional. That’s also why a conventional competitor can’t casually match it: doing so would mean giving up the merchandise margin its own model depends on.

The fee does a second job on the member’s side of the counter, and Costco’s filing shows how far that effect can go. Executive members, who pay a second $65 on top of the base fee, make up just under half of paid members but account for approximately 73.6 percent of worldwide net sales. The members who pay the most are also the ones who shop the most. Some of that is self-selection rather than commitment — the Executive tier pays for itself past a certain level of annual spending, so the heaviest shoppers have the clearest reason to upgrade in the first place. But the causality runs in both directions, and choosing to pay more is itself a second act of buying in. We’ve written separately about why people join memberships and what keeps them; the psychology of that decision belongs there.

What a 92.3 percent renewal rate proves

Costco reported a renewal rate of 92.3 percent in the U.S. and Canada in 2025, and 89.8 percent worldwide. Renewal is the most honest scoreboard a paid program has. It’s a yearly referendum in which every member can walk away, take their money elsewhere, and shop somewhere with free entry — and roughly nine in 10 choose not to.

The part I keep coming back to is that Costco members don’t merely renew. They defend the fee. Ask someone why they pay $65 a year for the right to shop somewhere, and you’ll often get an argument rather than a shrug. That isn’t how people usually talk about a cost. It’s how they talk about a decision they still feel good about.

That’s a more demanding test than most program metrics. Sign-ups tell you how persuasive your pitch was. Renewal tells you whether the thing was worth having, judged by the person who paid for it, 12 months after the pitch has worn off.

McKinsey’s research on paid loyalty found that the distinction matters: hard-value benefits such as discounts tend to drive sign-ups, while experiential benefits shape whether people renew. That’s one reason a points program and a paid membership aren’t interchangeable levers, which we compare directly in memberships versus loyalty programs.

Costco succeeds on both fronts, and the reason is unusually specific. The savings get people through the door. The experience of shopping at a store that reliably doesn’t try to squeeze them makes renewal feel obvious.

REI’s co-op model reaches a similar place from a different direction, with ownership standing in for the purchasing-agent promise. Prime is the closest cousin in this set: also a fee, also a habit engine, but built on convenience rather than price discipline.

Where merchants go wrong copying this

Costco is one of the membership businesses merchants cite most often, and one of the easiest to misread. Four mistakes show up again and again.

• Charging the fee without changing anything else. A fee on a store that still runs ordinary markups isn’t much of a membership. It’s a paywall in front of the same catalog. Members usually work out within a purchase or two that they’re paying for permission rather than for a meaningfully different arrangement. Even a membership that’s only a discount at least gives them something tangible.
• Assuming scale is the mechanism. Volume and turnover make Costco’s exact margins survivable, but the inversion itself is a pricing-policy decision, not a size requirement. A store doing $2 million a year can decide that its member pricing will be genuinely different from its public pricing and hold that line. What it can’t do is hold that line while protecting every dollar of its old margin.
• Treating the fee as a revenue line. When the fee is priced only as revenue, it tends to drift toward the highest number the market will bear, with perks added afterward to defend it. When it’s priced as a commitment device, the question changes: what amount is enough to change someone’s behavior? That number is often lower than the revenue-maximizing price and still worth far more to the business.
• Forgetting that the catalog has to be worth revisiting. Costco’s fee is relatively easy to renew because there’s always another reason to go back. A membership attached to a store with six products and no meaningful restocks is asking someone to pay annually for an experience they may only have once.

Build the Shopify-sized version

The lesson for a Shopify merchant isn’t “cap your markup.” Almost no independent store can hand back its merchandise margin and survive. The useful part to borrow is the incentive structure.

The fee has to buy something structural — something a non-member genuinely can’t get, and something that becomes more valuable as the relationship continues.

In practice, that comes down to four decisions. None requires rebuilding your store from scratch.

• Make it a real paid plan. A membership with a billing interval, an optional free trial, and an optional signup fee behaves differently from a free tier because the payment itself creates commitment. Weekly, monthly, annual, and custom intervals are all available. Costco’s annual cadence is worth studying for the reason above: an annual renewal is an explicit decision, while a monthly charge can become a habit that fades into the background.
• Make member pricing structurally different from a promotion. Order-level and product-level member discounts apply automatically at checkout, which already separates them from a coupon anyone can find. For this model, the most important setting is the option to stop member pricing from stacking on products that are already on sale. It’s the closest honest analog to Costco’s markup discipline because it tells members that their price is the standing price, not one more promotion layered on top of your sales.
• Give the fee something to unlock. Members-only products that are hidden from non-members, and purchase restrictions that let anyone browse while only members can buy, both create access rather than savings. Access is easier for a fee to defend. A competitor can match your discount tomorrow; it can’t match your catalog.
• Give people a reason to renew, not just to join. Access dripping can release benefits on a schedule tied to each member’s join date, so month nine includes something month one didn’t. Pair that with the perks section of the member portal, where members can see everything their plan includes. A member who can’t remember what they’re paying for is already halfway to canceling.

The recurring billing docs cover the plan settings, while member discounts explains the pricing perks, including the don’t-stack-with-sale-prices option.

Because this model is judged by renewal, the last piece is watching renewal directly. Churn-risk detection flags memberships approaching expiry so you can act while the member is still a member. Lifecycle emails — especially the upcoming-renewal reminder and ending-soon notice — give the program a chance to remind someone what they bought instead of letting the decision arrive in silence.

Costco’s whole business is measured by one renewal number each year. A Shopify membership can show you who’s approaching that decision before it happens. That’s an advantage worth using.

When this model fits, and when it doesn’t

A fee-funded membership fits stores where members have a reason to return often, and where customers already compare prices — so a standing better price reads as a real benefit. The catalog must also have enough range or turnover to reward repeat visits. Grocery-adjacent goods, consumables, hobby supplies, pet products, and wholesale-flavored catalogs can all fit the pattern. So can any store with an existing group of customers who already order several times a year. Those customers are behaving like members before they’ve been given the benefits.

The model fits less naturally when the catalog is small or static, the purchase is genuinely one-off, or the margin can’t survive giving anything up. The failure case is simple: a paid membership on a store nobody visits twice is a fee for nothing, and customers will usually work that out within one renewal cycle.

If that describes your shop, a free membership that earns access through purchases may do more for retention than a paid one. It also avoids putting a price at the door of a store people are still deciding whether to enter.

The better test has surprisingly little to do with the fee itself: if a customer paid you today, would they have a reason to come back within a month? If the answer is no, fix that first. The fee amplifies whatever your store already is.

Decide what your fee is for

The reason Costco is worth studying isn’t the size of the numbers. It’s that the numbers show a fee doing something more interesting than collecting money. Costco’s fee reorganized the incentives of a $269.9 billion retailer so that keeping prices low became the profitable thing to do. Nearly nine in 10 of its 81 million paid members renew because they can feel the result on the shelf.

That’s the transferable idea, and it scales down further than it first appears. A membership fee isn’t a tax on your customers. It’s a commitment on both sides — one that changes what the rest of your business is for.

Deciding what your fee is meant to change is the part no app can do for you.

If you’re working out what that looks like for your own store, our guide to starting a membership program on Shopify walks through the plan structure and perk decisions in order. You can also add Zendra to your store and build the first version on a free plan.