What Costco gets right about customer loyalty

Nov 7, 2019
5 MIN. READ
No traditional loyalty program necessary: the wholesale giant kills the loyalty game.

Okay, I’ll admit it… I love Costco. I’d put Costco in my top five favorite brands. And it’s arguably the brand I am most loyal to. Whether I’m getting gas, picking up basics or using my Costco credit card, I probably make a Costco-related transaction every day. It would be hard to remove Costco from my daily life. And even though Costco doesn’t have a “traditional” loyalty program, it drives active customer participation and just plain nails it when it comes to customer loyalty. Brands across a wide variety of industries can learn from Costco’s use of key loyalty drivers (trust, reliability, empathy, shared values, appreciation, and investment) across the entire brand experience.

When we think about customer loyalty, we think about three core categories: habitual loyalty, transactional loyalty, and emotional loyalty. In the cases of habitual and transactional loyalty, customers choose a brand based on price, service, or value of rewards. Or, maybe it’s just easy to understand and use. While these bonds can be hard to break, they are not as impenetrable as emotional loyalty, which is a mutual relationship between the customer and brand in which the brand and customer need each other. It is rooted in the same key drivers that power human relationships and should be the goal of any customer retention initiative.

Emotional loyalty should be a brand’s goal, but it’s still worthwhile to check the boxes of all three loyalty categories. It’s a rare feat, but Costco manages to hit the mark. So, what is it that Costco does that makes it so effective at engendering customer loyalty, and what lessons can brands take away?

Takeaway 1: Your brand doesn’t need to offer great deals all the time, but there is tremendous opportunity for transactional loyalty in offering a few consistent, reliable values.

While I should dispel the notion that Costco always has the best price (they do not), certain products and categories are truly a great deal through a combination of high-quality private label products, bulk quantity, or loss-leader status. Gas is a prime example. Those who fuel up at Costco save more than a few cents per gallon, guaranteed.

Additionally, Costco’s credit card product is simple and lucrative. With membership built into the annual fee and Costco Cash rewards at a high increment, it’s an easy card to carry and use. And the rewards structure makes it a no-brainer to shop and fuel up at Costco.

Your brand doesn’t need to offer great deals all the time, but there is tremendous opportunity in offering your customers a few consistent, reliable values. In doing so, you can demonstrate trust, reliability, and investment, which will help build customer loyalty (in this case, it’s transactional loyalty). As a Costco customer, I can trust the Costco value proposition and can rely on certain values that Costco always offers. I also realize that these deeply discounted items are an investment in our relationship and in earning my business.

Takeaway 2: A customer-focused location and layout can drive habitual loyalty.

It’s easy to get into the habit of heading to Costco when you buy your staples there, and Costco’s staple products (like paper towels, milk, chips) are well-priced and high quality.

Stores are typically located near major highways and in first-ring suburbs that make it an easy habit to swing by on your way home from the office or on a Saturday morning. And while it’s not necessarily a deciding factor in why people choose Costco, the locations literally position it for easy access, and to become part of customers’ routines.

Costco’s merchandisers make it easy to explore the store. Between good use of end-caps, the seasonal products near the door, SAMPLES!, and placing many staple items in the back of the store, Costco encourages shoppers to explore. Dare I say it’s fun to shop?

In many ways, Costco’s locations, product mix and merchandising approach are deeply rooted in two key drivers of loyalty: empathy and reliability. Clearly, the brand appreciates that customers are busy and on the go. And while we are often there to clear the shopping list as quickly as possible, Costco does a stellar job of bringing a little fun to the store. In today’s highly competitive retail environment, you can no longer expect the customer to go out of their way for you. Meet them where they are and make your store a place they want to be. This is sound advice for retailers across the spectrums of category and cost.

Takeaway 3: Invest in the customer experience to establish and maintain emotional loyalty.

Costco’s club model requires that shoppers pay for an annual membership. They make you invest. But this investment is rewarded in all of the ways discussed above and in cash back (at certain membership levels).

While customers can count on a huge array of consistently available products or seasonal favorites, Costco also mixes it up and consistently brings in new and unique specialty products. As the brand has grown, they have invested in adding pharmacy, self-checkout, liquor stores, tires, and even special pricing deals with vendors outside of Costco for things like travel, HVAC, and countertops.

And finally, that rotisserie chicken. It’s just damn good.

Where Costco really excels is that they double down on appreciation and investment, which are both key drivers of emotional loyalty. They ask customers to invest in Costco, and in turn they invest in the experience. They consistently show appreciation to their customers by enhancing their offering. They make it easy to like them.

While no brand is perfect, Costco hits the nail on the head in more ways than most. Between connecting with customers transactionally, habitually, and emotionally, and by going the extra mile with their deals and offerings, Costco is on to something. If you’re looking to improve your brand’s loyalty strategy, consider taking a page out of their playbook. You’ll need some fuel to do so, so grab one of those chickens while you’re at it.

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By Ned Shugrue
Ned Shugrue
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