The US retailer Costco is well known for selling goods at extremely low margins, which results in a reputation for low prices, which creates demand, which gives it leverage over its suppliers, creating a virtuous cycle. Membership fees, which make up 2% of sales, make up a little over 100% of their profit. It’s essentially a subscription business. One way to look at it is that the entire company runs on the margins it makes from the sale of goods. The subscriptions are straight profit. [1]
Amazon’s Prime Membership programme is similar, and very well known. Prime membership fees also contribute over 100% of its profit (the way this works is different from Costco) [2]. This means just like Costco, Amazon would be unprofitable were it not for Prime. Put another way, Amazon can operate on extremely thin margins because of Prime memberships.
This came up while thinking about a membership programme for the wealth service. We had two ways of thinking about the pricing:
- Costco-like:
– Membership revenue is main customer lifetime value (CLTV)
– Members get rewards that are equivalent to the revenue the company makes off their (increased) investments
- Amazon-like:
– Commissions on (increased) investments is the main CLTV
– Members get their membership fee back in the form of rewards
It’s interesting that two similar business models result in two very different ways of thinking about our own membership programme.
Endnote: The next step was to model to see under what scenarios – of membership fees and increased investment (and commissions) due to membership rewards – one model is more favourable than the other. Obviously, the results are not public.
[1] Read this Twitter thread for a 1-minute overview, and this presentation (also linked in the thread) for more in-depth coverage
[2] This Fool article shows how Prime Memberships drive profit.