The Costco Paradox | Small Business Lessons

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Small Business Strategy

Most big companies follow the same basic playbook. Charge as much as you can. Pay as little as you have to. Keep the difference.

Costco does none of that. And it is one of the most successful companies in the world because of it.

In fiscal year 2025, Costco made $275 billion in sales (TradingKey, 2025). It is the third biggest retailer on the planet, behind only Walmart and Amazon (Motley Fool, 2025). Its stock has gone up about 429 percent in the last ten years (Motley Fool, 2025).

It got there by doing things every business school says not to do.

They Decided Not to Make Much Money on Products

Most stores mark things up 25 to 50 percent over what they paid for them. Costco caps its own markup at about 14 percent on name brands and 15 percent on its Kirkland products (Talon.One, 2024; Vision Times, 2026). Their own government filings say they run at “significantly lower gross margins than most other retailers” (Costco Wholesale Corporation, Form 10-K, FY2025).

Their gross margin on $270 billion in sales was about 11 percent (Costco Wholesale Corporation, Form 10-K, FY2025). In most businesses, that would be a crisis. At Costco, it is the plan.

So where do they actually make money? Memberships. In the 2024 fiscal year, $4.8 billion in membership fees made up about 52 percent of their total operating income (Costco Wholesale Corporation, Form 10-K, FY2024; Motley Fool, 2024). The products barely break even. The fees are the business.

This does something smart. It means Costco has no reason to raise prices on you. If they overcharge you, you stop renewing. And about 90.5 percent of members worldwide do renew every single year (Costco Wholesale Corporation, Form 10-Q, February 2024). That number tells you everything you need to know about whether people think the deal is worth it.

They Pay Their Workers Way More Than They Have To

The federal minimum wage is $7.25 an hour (U.S. Department of Labor, 2025). Costco’s minimum is $20 (CFO Dive, 2025). Their top workers make $31.90 an hour, with raises already locked in through 2027 (HR Grapevine, 2025). The average Costco worker in the U.S. makes about $31.46 an hour in 2026 (Crystal Clear News, 2026).

After six years on the job, workers get bonuses twice a year. Those bonuses range from about $5,500 to $10,000 a year depending on how long they have worked there (Bandana Resources, 2025). They also get both a 401(k) with company matching and an old school pension, something almost no employer offers anymore (Fractional Brand Managers, 2026).

What do they get back for all of that? About 93 out of every 100 workers are still there after a year (Makerstations, 2026). In most retail stores, 60 to 70 out of every 100 workers quit within a year (National Retail Federation, as cited in Lattice, 2024). At Costco, after the first year, only about 6 out of 100 leave (Crystal Clear News, 2026).

Here is the part people miss. When a worker quits, the company has to find someone new, train them, and wait for them to get good at the job. That costs real money. If you are losing 60 to 70 percent of your people every year, you are paying those costs over and over. If you lose 6 percent, you almost never pay them at all. The high wages pay for themselves by avoiding those costs. Economists call this efficiency wage theory, and Costco is one of the best real world examples of it working (Wall Street Journal, as cited in RetailWire, 2025).

What Small Business Owners Can Do With This

You cannot copy Costco. You do not have their scale, their buying power, or their membership model. But their results teach three things that apply to almost any business.

First: replacing people costs more than you think.

Most business owners know their payroll. Almost none know their true turnover cost, the time it takes to find someone, train them, and wait for them to get up to speed. When you add that up honestly, paying people a bit more to keep them often costs less than replacing them over and over.

Second: keeping customers is better than squeezing them.

Costco makes less on each transaction on purpose. They make it back because people keep coming back. A client who stays with you for five years costs you nothing to keep and brings in money every year. A client you lose after one transaction costs you the same amount to replace as it did to find in the first place.

Third: doing fewer things better beats doing more things poorly.

Costco sells about 3,700 to 4,000 products. A normal grocery store sells 30,000 to 100,000 (Vision Times, 2026). Costco’s focus is a big part of why they are so good at what they do. A lot of small businesses try to offer everything. The ones that pick a few things and do them really well usually win.

Please note: The observations and insights in this post are general in nature. The Muninn Group shares general analysis and observations in this Insights section. Specific strategic recommendations for your business require a direct engagement where your particular situation, market, competitive position, and financial reality can be assessed properly. Your first consultation is always free. The Muninn Group will not hand you a deck full of buzzwords.

Works Cited

Bandana Resources. (2025). Costco actual pay and salary (2026). https://resources.bandana.com/resources/costco-actual-pay-and-salary-2024

CFO Dive. (2025, March). Costco raises minimum hourly wage to $20. https://www.cfodive.com/news/costco-raises-minimum-hourly-wage-20-compensation/742075/

Costco Wholesale Corporation. (2024). Form 10-K, fiscal year ending September 1, 2024. https://investor.costco.com

Costco Wholesale Corporation. (2024). Form 10-Q, period ending February 18, 2024. SEC EDGAR.

Costco Wholesale Corporation. (2025). Form 10-K, fiscal year ending August 31, 2025. Via TradingView SEC Report summary, October 8, 2025.

Crystal Clear News. (2026). Costco employee strategy defies retail industry norms. https://crystalclearnews.com/costcos-employee-strategy-defies-retail-industry-norms/

Fractional Brand Managers. (2026, June 14). Costco employee wages 2026. https://www.fractionalbrandmanagers.com/post/costco-employee-wages-2026-complete-pay-scale-benefits-retention

HR Grapevine. (2025, March 13). Costco CEO hails new employee deal with wage rises and added perks. https://www.hrgrapevine.com/us/content/article/2025-03-13-costco-ceo-hails-new-employee-deal-with-wage-rises-added-perks

Lattice. (2024, September 16). How to retain great employees with Costco’s Anna Haaland [Podcast]. https://lattice.com/podcasts/anna-haaland

Macrotrends. (2025). Costco operating margin 2010 to 2025. https://m.macrotrends.net/stocks/charts/COST/costco/operating-margin

Makerstations. (2026, May 8). Costco employee statistics 2026. https://www.makerstations.io/costco-employee-statistics/

Motley Fool. (2024, December 22). Is Costco still a buy at $1,000 per share? https://www.fool.com/investing/2024/12/22/is-costco-still-a-buy-at-1000-per-share

Motley Fool. (2025, December 28). 3 must-know facts about Costco before you buy stock. https://www.fool.com/investing/2025/12/28/3-must-know-facts-costco-before-you-buy-stock/

National Retail Federation. Employee turnover statistics. As cited in Lattice. (2024). https://lattice.com/podcasts/anna-haaland

RetailWire. (2025, February 10). Is elevated pay a core driver of Costco’s success? https://retailwire.com/discussion/is-elevated-pay-core-driver-costcos-success/

Stratrix. (2025). Costco caps its own markups. https://www.stratrix.com/pricing-lens/why-costco-caps-markups-at-14

Talon.One. (2024, March 26). Essential lessons from Costco’s promotion strategy. https://www.talon.one/blog/what-we-can-learn-from-costcos-promotion-strategy

TradingKey. (2025, September 28). Costco closes 2025 with a bang. https://www.tradingkey.com/analysis/stocks/us-stocks/251126354-costco-cost-earnings-tradingkey

U.S. Department of Labor. (2025). Federal minimum wage. https://www.dol.gov/agencies/whd/minimum-wage/history

Vision Times. (2026, February 10). How Costco keeps prices low and why its membership model reshaped global retail. https://www.visiontimes.com/2026/02/10/how-costco-keeps-prices-low-and-why-its-membership-model-reshaped-global-retail.html

Wall Street Journal. Efficiency wage theory and retail labor markets. As cited in RetailWire. (2025, February 10). https://retailwire.com/discussion/is-elevated-pay-core-driver-costcos-success/

Yahoo Finance. (2025, June 6). Costco membership model powers outperformance as headwinds persist. https://finance.yahoo.com/news/costco-cost-membership-model-powers-173600831.html

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Philip White is the Founder and Principal Consultant of The Muninn Group, North Carolina’s premier strategic consulting firm. He is an Economist, Political Strategist, Geopolitical Risk Analyst, and accomplished Public Speaker based in Wilmington, NC. Contact: havi@themuninngroup.com | 910-632-0431 | themuninngroup.com

Small Business Strategy

There is a foundational assumption embedded in the conventional theory of corporate optimization, an assumption so widely held, so rarely examined, and so thoroughly institutionalized in business school curricula and investor expectation alike that it has achieved something close to the status of economic law. That assumption is this: the rational corporation maximizes margin at every available opportunity, treats labor as a cost variable to be minimized subject to market constraints, and extracts maximum value from each transactional unit in its revenue stream. The corporation that deviates from this framework, the theory holds, does so at its competitive peril.

Costco Wholesale Corporation has spent four decades building one of the most financially dominant retail operations in the history of American commerce by systematically and deliberately inverting every dimension of that assumption. The empirical record of what that inversion has produced is, at this point, sufficiently robust to constitute not merely an interesting corporate anomaly but a serious challenge to the theoretical foundations on which conventional retail strategy is built.

The Architecture of Deliberate Margin Constraint

The first and most structurally significant dimension of Costco’s strategic inversion concerns its approach to product pricing. Where conventional retail wisdom holds that margin maximization on merchandise is the primary mechanism of profitability, Costco has institutionalized a policy of deliberate margin constraint that would be, in most retail contexts, considered commercially untenable.

Retail industry analysts and multiple independent observers have documented that Costco caps its own product markups at approximately 14 percent on nationally branded merchandise and 15 percent on its proprietary Kirkland Signature private label line, figures that stand in sharp contrast to the industry standard range of 25 to 50 percent that characterizes most conventional retailers (Talon.One, 2024; Vision Times, 2026; Stratrix, 2025). Costco’s own SEC filings corroborate the underlying principle explicitly, describing the company as operating “at significantly lower gross margins than most other retailers,” an extraordinary disclosure for a document whose primary audience is investors whose returns depend on the company’s profitability (Costco Wholesale Corporation, Form 10-K, FY2025).

The aggregate financial consequence of this markup policy is a gross margin of approximately 11.12 percent on net sales of $269.9 billion in fiscal year 2025, a figure that, in isolation, would suggest a company operating perpetually on the edge of commercial viability (Costco Wholesale Corporation, Form 10-K, FY2025). In the context of Costco’s actual business architecture, however, it is not a weakness. It is the mechanism through which the company’s true strategic logic operates.

That logic rests on a fundamental restructuring of where profit is generated. Rather than treating merchandise as the primary profit center, as virtually every conventional retailer does, Costco routes its profit through membership fees, treating merchandise pricing as a service delivered to members rather than a mechanism of extraction. In fiscal year 2024, membership fee revenue of $4.8 billion represented approximately 52 percent of Costco’s total operating income of $9.28 billion, while the merchandise business itself operated at an operating margin of approximately 1.8 percent, barely above breakeven on a standalone basis (Costco Wholesale Corporation, Form 10-K, FY2024; Motley Fool, 2024).

The strategic implications of this architecture are profound and non-obvious. By routing profit through membership rather than merchandise, Costco has engineered a business structure in which raising prices on members is not merely undesirable but structurally self-defeating. A worldwide membership renewal rate of 90.5 percent and a U.S. and Canada renewal rate of 92.9 percent as of the end of fiscal year 2024 represent the empirical measure of whether that belief holds (Costco Wholesale Corporation, Form 10-Q, February 2024). The markup cap is the mechanism that sustains those renewal rates. It is not charity. It is architecture.

The Labor Investment That Efficiency Wage Theory Predicted

The second dimension of Costco’s strategic inversion, and the one that has drawn the most consistent criticism from analysts wedded to conventional labor cost minimization, concerns its approach to employee compensation. In an industry where the suppression of labor costs is widely treated as an operational imperative, Costco has built a compensation structure that stands so far above industry norms as to constitute a fundamentally different model of the relationship between employer and employee.

As of 2025, Costco’s minimum starting wage for all positions is $20 per hour against a federal minimum wage of $7.25 per hour and a retail industry average that, even following several years of upward pressure, remains substantially below Costco’s floor (CFO Dive, 2025; U.S. Department of Labor, 2025). Under the three-year labor agreement negotiated with the Teamsters Union in early 2025, top of scale service clerks reached $31.90 per hour in March 2025, with guaranteed contractual wage increases of $1.00 per hour locked in for both March 2026 and March 2027 (HR Grapevine, 2025). The average hourly wage across Costco’s U.S. workforce as of 2026 stands at approximately $31.46 per hour, a figure that represents more than four times the federal minimum wage (Crystal Clear News, 2026).

The compensation structure extends beyond hourly wages: after six years of continuous full-time employment, Costco workers become eligible for semiannual performance bonuses ranging from approximately $5,500 annually for those below ten years of service to approximately $10,000 annually for employees with 25 or more years of tenure (Bandana Resources, 2025). Costco further distinguishes itself through the provision of both a 401(k) plan with company matching and a defined benefit pension plan for eligible employees, a combination that has become sufficiently rare in contemporary American corporate compensation to constitute a genuine competitive differentiator in labor markets (Fractional Brand Managers, 2026).

The measurable behavioral consequence of this compensation architecture is a one-year employee retention rate of approximately 93 percent, in an industry where the National Retail Federation has documented annual turnover rates of 60 to 70 percent as the norm (Makerstations, 2026; National Retail Federation, as cited in Lattice, 2024). For employees who have completed their first year, Costco’s annual departure rate falls to approximately 6 percent (Crystal Clear News, 2026). The magnitude of this differential, 6 percent versus 60 to 70 percent, is not a marginal operational distinction. It represents a fundamentally different cost structure for what is ostensibly the same business activity.

The theoretical framework that best explains Costco’s labor strategy is efficiency wage theory, the economic proposition that above market wages can produce sufficient reductions in turnover, increases in worker productivity, and improvements in employee quality to effectively pay for themselves through the operational improvements they generate (Wall Street Journal, as cited in RetailWire, 2025). Every employee departure triggers a cascade of direct and indirect costs: recruitment, screening, onboarding investment, the productivity gap during the new hire’s learning curve, and the loss of institutional knowledge and member relationships carried by the departing employee. An organization operating at 60 to 70 percent annual turnover absorbs those costs as a structural and continuous feature of its operations. An organization operating at 6 percent turnover does not. The higher wages are, in significant and empirically measurable part, financing their own existence through the replacement costs they eliminate.

The Financial Vindication of the Counter-Conventional Model

The most effective rebuttal to critics who characterize Costco’s approach as strategically naive is, ultimately, its financial performance. In fiscal year 2025, Costco generated total revenue of $275.24 billion, an 8.17 percent increase year over year, and net income of $8.099 billion, representing a 10 percent increase from fiscal year 2024 (TradingKey, 2025; Costco Wholesale Corporation, Form 10-K, FY2025). Costco is the third largest retailer in the world by revenue, behind only Walmart and Amazon, and its equity has delivered approximately 429 percent total returns over the decade ending in late 2025 (Motley Fool, 2025). The company has demonstrated consistent resilience through periods of macroeconomic contraction, industry analysts have noted that during the 2008 to 2009 financial crisis, Costco maintained membership numbers and continued operating profitably at a time when broad retail sales declined substantially, a pattern attributable to the membership model’s structural incentive for members to utilize the access for which they have already paid (Yahoo Finance, 2025).

The operating margin of approximately 3.58 percent in fiscal year 2024 represents, in absolute terms, a thin margin by the standards of most industries (Macrotrends, 2025). In the context of a revenue base approaching $275 billion, operating against a competitor set whose structural costs are substantially higher, that thin margin becomes the product of superior operational architecture rather than commercial inadequacy.

Strategic Propositions for Small Business Application

The Costco model does not translate directly or without modification to small business contexts. The specific mechanisms, membership fee revenue, bulk purchasing leverage, and warehouse scale operational efficiency, are products of a scale that most small businesses will never approach, and it would be analytically irresponsible to suggest otherwise. What the Costco model does provide, however, is a set of rigorously tested empirical propositions about the relationship between employee investment, pricing discipline, customer loyalty, and long-term financial performance, propositions that are applicable, with appropriate contextual adjustment, across a wide range of business types and sizes.

The first proposition concerns the true cost of labor turnover. Most small business owners make compensation decisions based on the visible, direct cost of wages. What the Costco model demonstrates empirically is that the full economic cost of labor includes not only wages paid to current employees but all costs associated with replacing departing ones. When those replacement costs, recruiting time, screening time, onboarding investment, productivity loss during transition, and the relationship capital and institutional knowledge that exit with experienced employees, are calculated with genuine precision, the compensation threshold at which retention becomes economically superior to replacement often proves to be substantially higher than intuition suggests.

The second proposition concerns the structural relationship between pricing strategy and customer loyalty. Costco’s membership architecture demonstrates that a business model built around consistent value delivery and the cultivation of long-term customer loyalty can generate superior cumulative financial returns compared to a model built around maximum margin extraction per transaction. The economic logic is straightforward: a client retained across multiple years generates cumulative revenue with zero additional acquisition cost. A client who churns after a single transaction must be replaced, at full acquisition cost, simply to maintain the existing revenue base. Margin compression in service of retention is, under a wide range of conditions, a positive net present value investment.

The third proposition concerns the competitive advantage of operational focus. Costco’s approximately 3,700 to 4,000 stock keeping units, against the 30,000 to 100,000 items carried by conventional supermarkets, is not a limitation imposed by operational necessity but a deliberate strategic choice that produces measurable commercial advantages: enhanced purchasing leverage with suppliers, reduced complexity in inventory management, and a cleaner, more comprehensible value proposition for members (Vision Times, 2026). The discipline to resist the expansion of offerings in the absence of a clear strategic rationale is a capability that creates value in small business contexts at least as much as it does at the warehouse scale.