How to Build a Loss Leader

If you’ve been listening to the podcast for a while, you have likely heard me mention Costco before. They do so many things differently than traditional business might suggest is best or profitable, but they have found a way to make it work and their business thrives because of it. In this episode, I’m going to discuss how Costco rivals almost any store or brand, and how they don’t do traditional marketing and advertising.

I’ll talk about how they invest back into the community, have a simple code of ethics, reward shareholders, and how having a membership model and plan can work if it’s done right. Costco is the perfect brand for a behavioral economics analysis, because they do things differently, but in a smart, strategic way that makes their unconventional plan a huge success. Today, we learn why Costco is the powerhouse that it is (and what you can implement in your own business - even if your model is completely different).

Show Notes:

• [04:19] Many consider Costco’s biggest rivals to be Walmart / Sam’s Club or Target – but depending on the section of the store…they pretty much compete with everyone: from Amazon, Home Depot and Best Buy to Expedia, Pizza Hut, Les Schwab and your local optometrist.
• [04:54] They participate in the community and reinvest in the company in a way that creates advocates, which reduces the need for traditional marketing.
• [05:32] That gets me to the core of Costco – their mission. It seems basic and generic enough, “to continually provide members with quality goods and services at the lowest possible prices.”
• [06:06] But they differentiate with their Simple Code Of Ethics: Obey the law. Take care of our members. Take care of our employees. Respect our suppliers. And then, reward shareholders.
• [06:57] The Costco membership model.
• [08:01] A membership is good for the store because it encourages people to shop there to “get their money’s worth” – this is loss aversion in action. And, this is not just triggered by perceived ownership…you actually have some real ownership because you have paid to be part of the in-crowd.
• [09:29] Costco has put a lot of work into making it a lifestyle choice.
• [10:22] Having time to slow down and experience with all the senses puts perceived ownership into overdrive.
• [10:54] This aversion to losses combines with the scarcity factor to encourage people to buy more. I’m sure items are scarce at Costco to encourage sales, but there is more to it than that. The high turnover of product and high efficiency model of Costco increases their profit margin and allows the whole model to really work.
• [11:31] They also have a very generous return policy.
• [13:22] The Costco food court is one of predictable beauty, which as you know is a perfect recipe for building habits.
• [15:28] And, of course, this increase in sales is made possible by one form of marketing Costco does believe in – free samples. Again, this is loss aversion and reciprocity at work.
• [17:12] If the item is an exclusive Kirkland Signature item, you know the exact thing isn’t available in other stores. All Kirkland Signature products are carefully researched, tested, hand selected, or custom-created by Costco. They truly live their mission through the whole Kirkland Signature experience – of doing best by their members, employees and suppliers.
• [20:02] One reason samples increase sales at Costco is because there are not too many choices.
• [21:28] Happy employees means lower turnover, which reduces expenses. Happy employees also means a better experience for shoppers, which keeps them happy and coming back. And, knowing that you shop at a place that values their employees also makes shoppers feel good.
• [22:34] Costco also does a lot of work to support their local communities, with a focus on children, education, as well as health and human services for grants and donations.
• [24:00] Costco works with partners and uses the value of bulk buying with their suppliers.
• [25:09] It is about knowing profits matter, but they aren’t everything. Squeezing out an extra 50 cents on hot dogs or rotisserie chickens – or allowing for a 16% margin on some products would make a huge impact on shareholder pockets, but it isn’t worth the negative it would cost to the members, who come first.
• [27:04] No company’s set up is something any other business can copy and paste.
• [27:29] Costco knows who they are and what their brand is there to do, and every decision they make is so easy because they can tie it back to the mission and code.
• [29:16] Is being a member of benefit that would work well in your business? Think about the value.
• [30:43] What do you stand for? Make it clear to yourself, employees, customers, and more.
• [32:04] Do you make it easy for people to buy from you? Are you encouraging them to get items or is it difficult? Can they get a test or sample?
• [33:42] Money back guarantees are worth it.
• [34:00] Should you incorporate a loss leader that benefits people and draws them in?
• [35:09] Think about the full experience. What can you be doing?
• [36:33] Everything matters, and it's always important to try things.

Thanks for listening. Don’t forget to subscribe on Apple Podcasts or Android. If you like what you heard, please leave a review on iTunes and share what you liked about the show.

Links and Resources:

• Unlocking the Secrets of the Brain
• @wagsRJ on Twitter
• Magic of Self Direction by David S Schwartz
• @BusinessBrosPod on Twitter
• Rich Dad, Poor Dad by Robert Kiyosaki
• A More Beautiful Question by Warren Berger
• Fierce Conversations by Susan Scott
• Costco’s Mission, Business Model, Strategy & SWOT
• The Costco Story
• What is Costco's Mission Statement and Code of Ethics?
• Episode 9. Behavioral Economics Foundations: Loss Aversion
• Episode 19. Behavioral Economics Foundations: Herding
• Episode 45. Overview of Personal Biases
• Episode 46. Biases Toward Others – Including Groups
• Episode 23. Behavioral Economics Foundations: Reciprocity
• Business Strategy Lessons From Costco Business Model
• Episode 24. Behavioral Economics Foundations: Sense of Sight
• Episode 28. Behavioral Economics Foundations: The Sense of Touch
• Episode 26. Behavioral Economics Foundations: The Sense of Taste
• Episode 25. Behavioral Economics Foundations: The Sense of Smell
• Episode 27. Behavioral Economics Foundations: The Sense of Hearing and Sound
• Episode 14. Behavioral Economics Foundations: Scarcity
• 12 of the weirdest returns Costco employees have ever seen!
• Episode 21. Behavioral Economics Foundations: Habits
• Episode 22. The Power of Habit
• Things You Didn’t Know About the Costco Food Court
• Why Costco Food Courts Have Charged $1.50 for Hot Dogs Since 1985, According to Employees
• Costco's Great Pricing Strategy and Business Model
• Costco Builds Nebraska Supply Chain For Its $5 Rotisserie Chickens
• 5 Things You Didn’t Know About Costco’s Free Samples
• Episode 5. The Truth About Pricing
• Episode 35. Behavioral Economics Foundations: Nudges and Choice Architecture
• How Costco Became the Anti-Wal-Mart
• Costco's Simple Strategy For Outperforming Wal-Mart And Target
• Donation and Grant Eligibility Guidelines
• Costco Communities
• The Top 100 Retailers of 2018
• Episode 43. A Guide for You to Create a Brainy Brand
• Episode 44. Rebrand, Refresh or Reinforce?