Costco Pays Well and Charges a Membership

The story

Costco opened its first warehouse store in Seattle on September 15, 1983. Its founders, Jim Sinegal and Jeffrey Brotman, built on an idea from retail pioneer Sol Price: a giant, plain store with concrete floors, items stacked on pallets, and prices so low that shoppers would happily pay a yearly fee just to get in.

The heart of the model is a simple trade. Costco limits how much it adds to the price of what it sells. According to widely reported company policy, it marks up most brand-name goods no more than 14 percent over its cost, and its own Kirkland Signature products no more than 15 percent. A typical supermarket marks up many items far more. Costco also keeps its selection small, fewer than 4,000 different products in a warehouse, according to its 2024 annual report. Carrying fewer items lets Costco buy each one in huge amounts and push suppliers for better prices. Costco even treats a few prices as promises: its food-court hot dog and soda combo has cost $1.50 since 1985.

With such thin markups, how does Costco make money? A big part of the answer is membership fees. In fiscal 2024, Costco collected about $4.8 billion in membership fees, and those fees made up roughly two-thirds of its operating income. Because members have already paid to shop there, they tend to come back often, and most renew: at the end of 2024, about 93 percent of members in the United States and Canada renewed. That September, Costco raised its basic fee from $60 to $65 a year, its first increase since 2017.

The other unusual part of Costco's model is how it treats workers. In 2005, The New York Times reported that Sam's Club, Costco's main competitor, paid its workers about 42 percent less on average, and that Wall Street analysts had warned Sinegal he was being too generous to employees. That same year, about 85 percent of Costco's U.S. workers had company health insurance, compared with less than half at Walmart and Target. Sinegal largely ignored the critics. He argued that well-paid, well-treated workers stay longer and serve customers better, which saves the cost of constantly hiring and training new people.

Costco kept that approach after Sinegal retired in 2012. By the end of fiscal 2024, it said its starting wage in the U.S. and Canada was at least $19.50 an hour and its average U.S. hourly pay was about $31. In early 2025, during contract talks with its union workers, Costco announced raises that would bring top-of-scale hourly pay to $30.20 that March, with $1 increases planned for each of the next two years.

Costco's way of doing business is not the only path to success, and it doesn't fit every company. But it shows that paying people more and charging customers less are not always the enemies of profit. In fiscal 2024 Costco earned about $7.4 billion in net income, with about 76 million paid members, 890 warehouses and 333,000 employees around the world. For a small business owner, the lesson is not to copy Costco exactly, but to know clearly where your profit comes from.