Costco Case Costco: A Case Analysis Costco

Costco Case

Costco: A Case Analysis

Costco has long been a retailer of lower-priced goods. Now, the company is moving toward services like insurance, credit cards, phone plans, printing, and other options that could be accessed with a specific membership level. That level would cost users $100 per year, but testing of the options has been very positive in the majority of cases. Still, Costco has much to consider when it comes to whether they want to continue on the path of services and change what they normally offer that drastically. In order to determine whether they really want to move into more services, they will need to analyze both their situation and their market. Right now, they have good market share for what they offer, but they have no market share in the services market, since they are just considering moving into it. People are not familiar with the Costco brand where services are concerned, and Costco needs to consider that they have not had to market before. That will be something new to them, and they must study carefully so they can market correctly.

Additionally, Costco will be up against some stiff competition when it comes to insurance and other services, and that competition will come from well-established companies that have offered customers their services for years. Coming up with a good action plan that allows them to market effectively is crucial, as is the creating of contingency plans they can put into place if their original action plan does not perform well or if it has to be adjusted. Costco may find that their final plan becomes a mix of their action plan and bits and pieces of their contingency plans, so that they can use what works for them and what their customers want and need from them. Their action plan involves marketing their services moving forward, but they may have to adjust how they market to see success.

Situation Analysis

Right now, Costco is in a good situation as a retailer. It is a warehouse-style store that operates on the premise of providing a large number of goods and services at low prices. It is well-established and has been in the business for some time. Brand-name recognition is part of what makes it popular, and people shop at Costco because they know that they are going to get merchandise that has acceptable quality and a low price. Most people who shop at Costco do not think about getting anything else at the store other than the merchandise that they have come to expect. Because of that, Costco has been reluctant to move into other markets. Now, the company management feels that it is time to start doing something new, and that the Costco brand is well-enough established that it can handle providing customers with more choices and new, innovative options. That will help to make Costco a leader in more than one significant market.

Costco has cultivated its customer base over many years, since the company's early beginnings. Those who purchase items from Costco know that they will be offered low prices and that the quality will be good enough that they can use the item for a reasonable period of time. Costco has not positioned itself as a high-priced retailer, or a store where wealthy people would shop for high-end items. Instead, it has worked to market itself as a store where anyone can shop and get what they need for their home. When stores like Costco come from humble beginnings, they are often careful about the people to which they cater. That has been the case with Costco, and has helped to put the store into the strong situation in which it finds itself today. Of course, there is more to Costco's current situation than just staying humble. A great deal of hard work and company-building has been accomplished over the years, and that has made a significant difference in how Costco has been perceived.

Market Analysis

Market Size

Costco's market is large. They currently have stores throughout the United States, and their customers are generally very loyal to them. They also have some stories in foreign countries. Most of their customers are relatively affluent, more so than other stores with which Costco may compete. Because of what they can offer, they have a market size larger than would be expected. The market that they currently have can also be expanded, so that Costco can do more with what it has and can offer their services to people who would otherwise not know about them or be interested in them. Word of mouth has built most of Costco's current market size, but there is some concern that same approach will not work as well for the services that will be offered.

Market Growth

The growth of Costco's market is important. Naturally, all businesses want to grow and develop. That is how they acquire new customers, and how they move forward with their plans for expansion. Costco has grown its market mostly through people telling other people about their good experiences with the company. Originally, people were skeptical about the Costco model, because the prices seemed to be too good to be true. The concern was that if the prices were so low the quality must be low, too. Fortunately, enough people tried Costco and talked about it to others that people started to realize the quality remained. The market grew because Costco offered what it said it would offer - low prices, a membership that allowed shoppers to belong to an exclusive club, good quality, no frills, and a great shopping experience where people could buy in bulk and save a lot of money on the things that they wanted and needed for everyday life.

Market Potential and Forecast

Costco has great market potential, and the forecast for the company's future is bright. For example, Costco is currently in 24 states, leaving them 26 more to explore. They are also only in five foreign countries, which leaves them more than 100 into which they can expand. The market potential is important for any company that is thinking about expanding, because expansion costs money. Companies do not want to expand into a market where they will not be welcomed, and Costco is no exception to that. It is dedicated to expansion, but only when it sees that the expansion will be beneficial to the company and will offer it what it needs in order to continue to make a profit and please its customers. The forecast for Costco involves both expansion into new areas of the country and the world and expansion into new markets with the offering of services for customers.

Market Segments

The main market segment for Costco comes from affluent and upper-middle-class individuals. That is not to say that they are the only people who shop there, but they are more likely to shop at Costco than people who make less money. Costco is planning on expanding its market, though, and the company has to pay close attention to whether the market is one in which it can succeed or one in which the new endeavor may fail. Segmenting the market beyond the level of income is very important for Costco, because it is going to offer so many different kinds of services. Not all of these services will appeal to all of its current customers, of course, but Costco is aware of that fact and knows that it must consider each customer as a separate entity and then determine how the customers fit together in order to market to them in the correct way. By ensuring that they market to the customers who are interested in their services, they will sell more and get a better market share.

Customer Analysis

The customers that purchase from Costco are more affluent, but they are thrifty. Even though they have money, they are very interested in getting the best deal. They buy in bulk because it costs them less and is convenient, and they own large vehicles (like SUVs) to transport the items that they purchase. These customers also have large homes, because they need places where they can store the large numbers of items they buy in bulk. In addition to fitting certain financial demographics and projections about home size and type/style of vehicles, the customers of Costco are very likely to renew their memberships. On average, nearly 85% of the members renew each year, so that they can continue to get their savings and the items that they want and need for their homes.

Consumer Behavior

Every consumer who comes to Costco is an individual, but yet they are all similar in many ways. It is important to understand the demographics of Costco's customer base, and also important to understand the way consumers buy things overall. Without a clear understanding of how consumer make their purchases, it can be very difficult to market to them correctly and to be sure that they are being offered what they really want. Consumers also tend to remember bad service for a longer period of time than they remember bad products, so Costco has to be careful about the kinds of services they are going to start offering and how they market those services to customers in their stores. A kiosk was used to tell customers about services when the test program was implemented, but more study of consumer behavior may be needed to determine whether the kiosk approach is the right one or whether it would be better for Costco to mail information to their current members, advertise through the Internet, or rely on word of mouth as it has done in the past.

Competitor Analysis

The competitors that Costco must watch out for include other warehouse stores (Sam's Club) and large, discount retailers (Walmart, Kmart, Target, etc.). there are other companies that sell items similar to what Costco has to offer, but the majority of the other competitors also charge significantly more for their items and do not allow them to be bought in bulk. They may also not have a "store brand" with quality that matches what the name brand products offer, and that can affect how much a person likes to shop at a particular store. In other words, if a person does not feel as though the offered brands are quality at a good price, it can be very easy for that person to decide to choose a different store to meet his or her needs. Costco wants to avoid having its customers go to another store, so it must continue to offer everything that its customers need and want. If it is losing customers, determining why that is the case is vital so that more customers can be retained. Getting customers is often easy, but retaining customers is much more complex.

Costco's competitors understand the discount retail concept just as well as Costco in most cases. Especially with Sam's Club, Costco has some real competition for both price and bulk items. The warehouse setups are very similar, making Sam's Club a direct competitor of Costco. Both require memberships, and both check the member's validity at the entrance and require them to show a purchase receipt when they leave. This provides an air of exclusivity to the warehouse club model, and also reminds the people who shop there that their membership is buying them something that others do not have. Walmart and other discount retailers do not provide that level of exclusivity, and so are not direct competitors but indirect competitors. Still, they can take market share away from Costco and it is very important that the company pays attention to any and all competitors.

Company Analysis: Classic SWOT Analysis

Strengths

Costco has many strengths, and they should all be used to continue to make the company healthier. These include:

Brand recognition among customers and potential customers who recognize what Costco has to offer.

A reputation as a low-cost, high-quality, no-frills retailer offering many different items.

The exclusivity that comes with membership for its customers.

A long history of doing business and treating customers well.

A large percentage of the market share for warehouse clubs and discount retailers.

A commitment to both good products and good service.

Weaknesses

Like any company, Costco also has its weaknesses. The main weaknesses seen in the company are:

A lack of other services over and above the discount goods that are offered to its customers.

Only word-of-mouth advertising, instead of a strong campaign to get its name out to customers.

Little to offer to people who want a high-end, luxurious shopping experience.

Little to offer to people who want savings and discounts but who do not want to buy items in bulk.

Not marketed to people who do not make much money, because they generally do not have houses and cars that will hold large items bought in bulk.

Opportunities

All companies have opportunities to grow and develop and expand, and Costco is no different. The company's opportunities include:

Moving toward services that offer more to customers than just low-cost merchandise at reasonable prices.

Moving into new markets in other states and foreign countries where the company is not yet established.

Opening their membership up to more than one level of customer.

Growing the Costco brand to be synonymous with quality in all facets of company offerings.

Threats

Every company faces threats. Each one of them has to deal with various threats that come about, and they have to be ready for changing conditions. For Costco, the main threats to the company include:

Sam's Club or other warehouse clubs that can take market share from Costco through their offerings.

Other retailers that may move toward the creation of warehouse clubs in areas Costco already services.

A lack of advertising by Costco and/or a lot of advertising by another company that would take customers away from Costco.

Moving into new markets and having those efforts fail, costing the company customers that no longer feel comfortable with Costco.

Rapid growth of services that leads to lower quality of goods.

Marketing Objectives

Costco has objectives for its marketing. The company knows that it needs to be seen more than it has in the past. When it first started marketing, Costco relied mostly on the word of mouth of the customers who purchased items from them and held memberships. Now, though, with the idea of moving into more of a service-oriented business in addition to what Costco currently does, there is a need to market in a way that reaches out to more people. Costco is uncertain how it should market, because there are several different options. Despite the fact that there are different ways in which to market, the objectives are still clear - to get more customers and retain the customers that Costco already has. Both of those objectives are important, and they offer Costco the option to create various marketing strategies that can be tried to see how well they work under specific circumstances or with certain demographic groups in which the company may be interested.

Marketing objectives for Costco specifically include:

Reaching the customers they currently have with information about the new level of membership.

Making sure customers understand how much benefit they can get from the new membership level.

Reaching out to potential customers who are not part of Costco's membership yet, so that they can see the value of Costco and what each membership level has to offer for them and their needs.

Selling customers and potential customers on the new membership level to the extent that they will be retained and stay with Costco's higher membership level when their membership comes due again.

Marketing Strategies

In order for Costco to meet its marketing objectives, it has to consider various strategies. These will differ depending on what the company wants to get across and the people to which they are reaching out. Overall, Costco's marketing strategies are relatively new to the company because they did not market much in the past. Once a company has spent most of its time marketing only by word of mouth, it can be difficult to come up with a marketing strategy - and the company may not think that a marketing strategy will be needed, since it really was not needed in the past. However, Costco is doing something completely different by marketing services instead of marketing only the goods that they have offered for many years. Because of the change, a marketing strategy that reaches out to customers and potential customers is in order.

Among the things that Costco intends to do as part of its new marketing strategy for its services are:

Reach out to customers who have a membership with the company and show them the value of the new membership level that can provide them with access to great discounts on all kinds of services.

Reach out to the people who live in the area where any new store is being built, so that people who are not familiar with Costco can learn about the store and the new membership level being offered.

Sell the services that it is going to offer with the new membership level, so that anyone (current member or potential member) sees the benefits that are available. Without seeing the benefits, customers may feel as though the extra price of the new membership level is too much for what they will receive.

Action Plan

Costco must have a plan of action if it is to be successful with its new venture. It is clear that the retailer is performing well from the standpoint of the sales of goods in a warehouse-style environment. However, that does not mean that Costco will have success with the sale of services to customers and potential customers. In order to have the best chance of success, Costco's action plan should include the following:

A clear-cut idea of the objectives the company wants to reach by marketing its new membership level to customers and potential customers in the area in which its stores are located.

A well-defined marketing strategy that allows the company to determine whether it is meeting its goals.

Specific ways in which the company will reach out to customers and potential customers, and how the company will track the numbers of people who respond to its marketing efforts.

A contingency plan for the company if the marketing of the new membership level and what it can offer to customers and potential customers is not successful and/or needs to be expanded or changed.

A plan for how the company will mitigate any damage caused by unsatisfied customers who have used the company's newly-offered services and have had an experience that is less than optimal.

A plan that will consider each subset of customers so that they are marketed to correctly and so that they have the highest and best opportunity to make the membership choice that is right for them.

Product

In the past, Costco's products have been goods that can be bought in bulk and that are of reasonable quality and sold at a relatively low price to members of its stores. Now, the product that Costco will be marketing is actually not a good at all, but a service. The way the service works is simple: customers who are already members of Costco can upgrade their $40 membership to the Executive level, which costs $100. At that level, they are eligible for discounts on a multitude of services including home and auto insurance, travel deals, and many other things that most people would use either on a daily basis or several times per year. While these types of deals have been available to consumers through other avenues for some time, they have not been offered through a retailer such as Costco. Because these kinds of services are not typically associated with retail stores, Costco may have some trouble convincing its customers of the value of the deals offered for the higher membership price, even if the discounts are impressive.

The test marketing of the deals showed that the overall response was favorable. People trust Costco because it has been established for some time, but they are unfamiliar with the idea of the new product in that they are not used to retail stores offering services at a discount. Because the membership costs more, not everyone will be interested in upgrading. If they do not feel they will use the new product, they will not want to pay more simply to be members of Costco and continue to only purchase goods from them in their stores. However, many customers will see that they could use at least one or two of the new services that are offered, and that the discounts they receive on those services more than pay for the extra amount they must spend for the more expensive membership. Any time a new product is marketed, even by an established company, promotion and related factors are very important.

Price

Costco is not selling a new product in the sense that they are offering a new good which customers can buy. Instead, they are selling a service by which a person can pay money to have access to other services, which will then provide that customer with a discount on those services. That may seem a bit convoluted, but it can also help people who are members of Costco to save money. Currently, the price of a Costco membership for an individual is $40. The membership that allows customers to access the services and discounts on those services costs $100. The $60 difference is not the true cost of the product, though, because there are discounts on services to take into account. The actual price of the product will depend on whether the customer uses the services, how many of them he or she uses, and how much money can be saved by that person when he uses those services and gets the discounts that are only offered to him or her through being a member of Costco.