Costcos Business Model Research Paper Example | Topics and Well Written Essays - 1000 words

Costcos Business Model - Research Paper Example Costco gains revenue not only from individual membership, but also households, and companies. This membership revenue pool is fixed for the year and in 2008 generated $1.5 billion. The main part of the business is literally to please the customer by having the best price. Everything else is based on that concept. Customer's have the ultimate say in what will be bought and sold. Costco doesnt want to have inventory that the customer has no desire for and thus inventory that will be slow moving. Thus Costco watches for specific characteristics of inventory which they will purchase and efficiently deliver to the customer at a price below its competitors. Another part of Costco's business model is the fact that Costco owns 80% of its retail operation stores. This investment in real estate allows Costco to avoid paying lease costs thus cutting down on operating costs. This cost reduction can further allow Costco to concentrate on having a low price, high volume merchandise business model. Also the membership fees can be allocated to purchasing buildings within a year or two since to access the savings the customers provide revenue outright. This can save Costco on long term debt if managed properly. Yes its a good model because due to their memberships customers are more likely to buy directly from them and with a certain level of guaranteed revenue, prices can be low with the assumption that volume will be high. Volume is never guaranteed but Costco can operate on this assumption because it is more than likely that the customer will do daily shopping for groceries in the case of the individual, and household while more than likely that businesses will purchase supplies through Costco in order to purchase office supplies. The only issue with the model is that when customers purchase in bulk, it is likely that the need for the product will be low for a considerable amount of time. If an individual purchases 5-10 boxes of energy efficient light bulbs, that customer is unlikely to come back for more light bulbs for a long time and the same can be said of companies and households. On the other hand it could be likely that the customer purchasing in bulk could be selling each bulb. 2. What are the chief elements of Costco’s strategy? How good is the strategy? â€Å"Low prices, a limited product line and limited selection, and a â€Å"treasure hunt† shopping environment†, are a few of the chief elements of Costco's strategy. They accomplish this by having rapid inventory turnover, less handling, efficient distribution, operating efficiency and â€Å"offering members very low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories.† Costco also only kept the best bargains on the shelves with little advertising and deciding on a growth strategy focusing on opening more warehouses and developing a loyal customer base. This is good strategy all around for a variety of reasons. Here is a breakdown of some of the major efficiencies Costco obtained: Due to the fact that they are able to receive cash before the payable is due, Costco didn't have to worry about carrying extra capital throughout the year in order to meet vendor payments. Therefore Costco was able to take advantage of discounts while obtaining direct financing from the vendor's. By doing this Costco was able to pass on part of the savings to customers and obviously retain some of the savings as profit. The way that Costco was able to provide such low prices to its member was that it only sought a 14 percent margin on national brands as opposed to the 20-50% that most other discount