A winning membership business model

A winning membership business model

The woman wore brown leather hot pants, a beige silk blouse, dangly earrings and over-the-knee black heeled boots. Thankfully, she was thin. Her partner, also in his late 20s, wore grungy jeans and an expensive leather jacket whose collar hit his rock-star-length locks. Next to them was an elderly Hispanic grandmother trying to keep tabs on three grade-schoolers, most likely children of her working daughter or son. An elderly blond women, her face the work of a terrific plastic surgeon, stood comfortably in very high-heeled shoes. Her Channel sunglasses matched the color of her Fendi handbag. Added to the mix was a teenage male covered in tattoos, wearing black flannel Turkish pants and a sleeveless matching top, despite the 72-degree weather. Each shopper’s cart was brimming, all with very different mixes of merchandise and groceries.

Welcome to Costco where you feel you are walking through a yellow page directory. A walk down one warehouse building aisle took me past a Lennox furnace for sale, hanging laundry baskets, snacks and piles of men’s blue jeans, eventually arriving at my destination, top brand wines at great prices. Far to my right, I saw refrigerated grocery store items and to my far left, gardening supplies.

Costco has an admirable set of corporate values, as expressed in its Code of Ethics.

1. Obey the law
2. Take care of our members
3. Take care of our employees
4. Respect our suppliers.

According to Costco’s Code, “If we do these four things throughout our organization, then we will achieve our ultimate goal, which is to reward our shareholders.”

And it has. The $110B company generates over $2B in profits and Costco stock outperforms the S&P 500. (See chart.) Its store brand, Kirkland, captures Costco’s value promise of great prices for superior products. Impressively, its same-store sales keep growing and each year’s new stores open with higher average sales than earlier cohorts of stores. Unlike Target failing in Canada and Walmart’s bout of bribery in Mexico, Costco’s global expansion has proceeded well. It also has a track record of reducing waste and energy usage due to its commitment to reduce its global footprint. Most admirably, it offers a living wage and hours to all its employees and promotes from within for managerial roles. (Starting salaries are $40k.)

All these attractive traits are achieved through a membership business model. Consumers from every walk of life have pooled their purchasing power, paying a small membership fee to get better prices for high quality products. Talented corporate resources enable the members’ collective effort. Membership fees total $2.4 B, more than profits, suggesting products are priced close to fully loaded costs.

This “everybody wins” model might seem communist to some. But think again. This type of organization is exactly how corporations started. The public came together to advance the common good by chartering activities that were too expensive or financially risky for individuals to pursue .

Somewhere since this worthy founding of corporations, we’ve allowed them to act in self-interest versus community interest. Employees of Walmart, for example, are over-represented in public health programs. We’ve provided corporations with personhood and an unlimited political voice, but they cannot be shut down for egregious violations of the law. This duality creates a pay-to-play system as witnessed in the large payments for regulatory violations by the largest US banks and pharmaceutical companies among others. And the leaders playing this game are, in general, immune from prosecution, as culture leaves no paper trail.

Our markets have moved from free markets (the kind referenced in the US Constitution) to crony capitalism, one where powerful entities lobby to bend rules in their favor. The most powerful earn what economists call “rents” (versus income generated from value creation).

Costco gives me hope. So do small and medium-sized businesses that capture the spirit of the earlier corporations, generating winning outcomes for employees, owners, customers, and communities. Employee-owned companies, like Colorado’s New Belgium Brewing Company, and social enterprises also fuel my spirit. So do the larger corporations that are making a commitment to the triple bottom line, like Unilever. It uses its supply chain and business models, not just its philanthropy, to advance global health.

We are all in it together – just like the people in the Costco checkout line. We can all work and win together and create a rising tide. Or not. Which path we take depends on our decisions as leaders, employees, consumers, voters, and investors. My observation is that whenever and wherever we pit one group against another, we all get less eventually.

What’s your organization’s version of delivering Costco-like value?

More articles by Kay Plantes

Kay Plantes is an MIT-trained economist, business strategy consultant, columnist and author. Business model innovation, strategic leadership and smart economic policies are her professional passions. She resides in San Diego, California but still considers Madison home. She is the author of Beyond Price.

The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of WTN Media, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.