Most businesses want to make as much money as possible from the products they sell. Costco has built part of its business around a different strategy: keeping prices low enough that customers see value in paying for a membership. Gasoline is one of the clearest examples. As gas prices climb above $4 per gallon nationwide, drivers are rushing to Costco, where gas is often about 30 cents cheaper than nearby stations. Demand became so strong this past summer that some Costco stations needed tanker deliveries several times a day to keep from running out. The rush pushed Costco’s fuel sales to the highest levels in its 50-year history.

Costco does make money on gasoline, but only a few cents per gallon. That is much less than the 25- to 35-cent markup common at traditional gas stations. Record gas sales can actually lower Costco’s overall profit margin because gasoline is one of its lowest-margin products. But Costco is not looking at the gas pump by itself. About half of members who buy gas also go into the warehouse, and Costco says members who use its gas stations typically spend more with the company. Gas accounted for about 10 percent of Costco’s sales last year, while membership fees provided roughly two-thirds of its profit. Cheap gas helps make those memberships more valuable and gives customers another reason to return.

But even Costco cannot keep every price low when its own costs rise. Crude oil recently climbed above $109 a barrel, raising the cost of producing synthetic motor oil. Costco has responded by nearly doubling the price of its Kirkland motor oil to $58 from about $30 last year and limiting how much customers can buy. Costco is facing higher costs for gasoline, too, but it has a business reason to keep its markup at the pump especially low. As gas gets more expensive, Costco’s lower prices become more valuable to customers. That has pushed more members to fill up at Costco, including some who had never bought gas there before. Costco is betting those customers will keep coming back even after gas prices fall.

Questions:

  1. Why does Costco price its gasoline lower than regular filling stations?

  2. Do you think Costco will be able to continue offering cheap gas if prices keep rising? Why or why not?