“Jim, we can’t sell this hot dog for a buck fifty. We are losing our rear ends.”
“If you raise the effing hot dog, I will kill you. Figure it out.”
This is just a snippet of the heated exchange which took place between Costco cofounder and former CEO Jim Sinegal and his soon-to-be successor Craig Jelinek, who had just then offered up the quite harmless suggestion that the company raise its hot dog and soda combo price to $1.75. True to its leader’s demands, Costco eventually did figure it out—but only by investing huge sums of money into its very own Kirkland Signature hot dog manufacturing plant, and, as a result, raising a critically important question: why would any company, especially one as large-scale as the Costco Wholesale Corporation, go through so much trouble just to minimize its own profit?
The answer lies in the concept of loss leading, a marketing strategy in which specific products are sold below retail price for the purpose of attracting customers. Once a shopper has their foot in the door, their interest can now be directed toward the company’s more profitable items, like that fancy Swiss chocolate in the shiny red packaging, and now, they certainly won’t be leaving without a few extra items in their cart. Costco famously employs this strategy with two particularly cheap ready-made meals.
First up, and by far the most well-known: the $1.50 hot dog and soda combo. This is Costco’s true claim to fame (and a major attraction too), as the current price has remained completely unchanged since the hot dog’s first sale in 1985.
Second, the $4.99 rotisserie chicken, which is strategically placed at the back of the warehouse so customers are obligated to browse through the aisles all the way up to their final destination. This encourages tons of impulse-based purchases every trip, as shoppers must make the treacherous journey past numerous free sample stations and shelves upon shelves of tempting products all vying for their attention.
However, while these loss leaders do serve their purpose, successfully drawing customers’ attention to the more expensive items on the shelves, they don’t actually gain Costco much in earnings, simply due to the exceptionally low markups Costco applies to its products. Items are rarely resold at more than 15% above retail price (for comparison, many corporations resell items for 25-50% more than they cost to manufacture), so the majority of Costco’s profit actually comes from annual membership fees—yet another way to keep customers coming back, because the more you buy, the more value you’re getting out of your membership card.
As a side note, this article was not written to scare you out of the Costco membership club. Though these marketing tactics may sound manipulative at first, they’re ultimately the main reason why the company is able to offer their customers high-quality items at such low prices without losing the funds needed to sustain itself. Costco has a reputation for prioritizing ethics and customer satisfaction over profit, and it’s earned the loyalty and trust of both its members and its employees, culminating in its 90% annual membership retention rate and its average employee turnover rate of 8% every year (while at other companies, the turnover rate is often somewhere closer to 60%). So the next time you go to buy a $5 rotisserie chicken or a hot dog and soda combo meal for just $1.50, remember that lives were threatened (in a very joking and good-natured manner) to keep those prices low for you. It just goes to show how committed Costco is to satisfying your wants and needs as a customer.