Somehow you got roped into hosting a large family gathering at your place.
You need supplies and don’t want to break the bank. Luckily, you know exactly where to go.
You arrive at the store and circle the lot a few times before finding a parking spot. It’s busy, as usual.
On your way inside you grab a supersized shopping cart (there aren’t any hand baskets here) and flash your membership card to the attendant at the front door. They wave you in.
As you make your way to the food section at the back, you pass aisles of brand-name flat-screen TVs, laptops, and cellphones. The electronics are cheap but they’re not on sale. That’s just how it always is here.
The store is bustling. You pass aisles of furniture, kitchen appliances, and household necessities (like garbage pails and bath towels). There’s somebody handing out tasty samples of a new cereal and another person demonstrating the features of the latest Vitamix.
You cruise towards the frozen foods section and grab a 30-pack of Kirkland brand toilet paper and two giant bags of Doritos.
Where are you shopping?
In today’s edition of Why We Buy, we’re doing something different.
Instead of exploring one buyer psychology topic in detail, we’ll analyze a well-known company to see how they’re using these principles in their business.
This week, we’re diving into—you guessed it—Costco.
Let’s get into it.
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A Look Inside COSTCO 🤑
Costco’s margins are impressively microscopic—they sell most items at just above cost—yet they’re the world’s 3rd largest retailer by sales.
Forty years from the day they opened their doors, the store looks almost identical. The biggest change is seen in the electronics displayed when you first enter.
Every year, the wholesale brand makes $191.2 billion dollars.
Their membership has a 90% renewal rate.
Clearly, Costco knows a thing or two about buyer psychology (okay, realistically they seem to know EVERYTHING).
How have they succeeded for this long with minuscule margins and almost zero innovation?
How Costco Uses Buyer Psychology 🧠
From first walking into a Costco store to rolling out with a full cart, you’re met with buyer psychology strategies.
Have you noticed these before?
By putting their most expensive products at the front of the store, Costco uses price anchoring to make your mind think anything less than that $1,000 TV is a great deal. Our minds anchor to the high price, and we suddenly think purchasing that extra 20-pack of mini chip bags isn’t such a bad idea.
You likely have a general sense of what a TV costs, right? Even though TVs may be one of the big-ticket items at Costco, they still sell brand-name TVs for significantly less than other retailers.
The price of the TVs relative to our expectations sets a good first impression. This comes in handy later. Why? Because while we may not know how much an 8-gallon jar of mayo should cost, we assume we’re getting a deal—like with the TVs.
Sunk Cost Fallacy
Once people buy their Costco membership, their minds tell them they better use it (or risk wasting their investment). This is “sunk cost fallacy” in action.
Instead of going to a nearby, easier-to-get-around grocery store, people are willing to make their way through the large warehouse because they’ve spent money to get “exclusive” access.
The Paradox of Choice
Costco has strategically built its businesses around giving customers fewer choices. This seems to go against the grain in comparison to retailers like Amazon, Wal-Mart, and Target, but Costco knows what people really want. A few, easy to compare options for their favorite products.
Giving away free samples creates a moment of delight with Costco. People know they’re getting something out of their grocery trip—the chance to eat a delightful new treat. Costco places free sample stations strategically around their stores, so you have to visit different food areas (and see more products) to get samples.
Thinking About Your Business 🤔
Even if you don’t sell giant jars of mayo, there’s lots that you can learn from Costco.
Q: Are you overwhelming buyers with too many choices?
Consider limiting the options available so buyers feel more confident about their choice (and don’t delay making decisions).
Q: Are buyers struggling to assess the value of your product?
Offer them something to compare it to that makes your value obvious. It doesn’t even need to be another product. You could use the pain of doing nothing as a contrast.
Q: Is there a way you can bring buyers into your ecosystem through a smaller purchase?
Whether you’re leveraging loss leaders or the sunk cost fallacy, you can show customers you’re trustworthy and worth further shopping with by asking for a smaller price upfront and a larger price further down the marketing funnel.
The Short of It 💥
Unlike other retailers, Costco doesn’t need to constantly innovate to dominate the market. They understand why buyers choose them and have designed their whole shopping experience to be distinctive.
Costco clearly understands buyer psychology—and luckily for us, we get to take notes.
Until next time, happy selling!