HOW COSTCO AND NETWORK MARKETING ARE ALIKE

Image source: Costco.

9 Things You Didn’t Know About Costco Wholesale Corporation

And 9 Things You Didn’t Know About Network Marketing

I find Costco’s business model very intriguing. It really reminds me of an industry that’s scrutinized by most 99ers who aren’t educated about the network marketing industry — and refuse to be¹.

¹In other words; stop trying to convince.

We’re going to compare Costco (and other wholesale warehouse chains) to the MLM industry and see if they are indeed light years apart, or as similar as conjoined twins.

Orginal article on Costco in italic by Demitrios Kalogeropoulos, FoxBusiness

Even if you’re not a paying member, you’re likely familiar with warehouse giant Costco . After all, it booked more than $100 billion of revenue last year and handled 2.3 million sales transactions per day.

Even if you’re not in network marketing, chances are you know someone who is. Granted Costco has a strong brand awareness. And those who shop there religiously swears by it. Unfortunately, there’s only one concern with that*. (find out on our spotlight below)

Costco sells 100 million hot dog and soda combos each year thanks to a $1.50 price tag that hasn’t budged since 1985. At last count, members were buying rotisserie chickens at an annual pace of 30 million.

Here are a few other facts that you might not know about the nation’s second-biggest retailer (behind Wal-Mart ).

1. Small beginnings: Costco’s first warehouse opened in 1983 in Seattle, Washington, seven years after Price Club launched its first store in San Diego, California. The two companies merged in 1993 and California remains Costco’s biggest single market.

Every major corporation started out small and tiny. And they all started —- somewhere.

2. Less choice: Costco carries far fewer products than rivals. The selection at a typical warehouse features about 4,000 items, compared to 150,000 at a Walmart and 80,000 at Target . “We seek to limit specific items in each product line to fast-selling models, sizes, and colors,”Costco executives explain in the 10-K report.

This is understandable when you understand your target market and niche. Having everything under one roof doesn’t always means better. In network marketing, you focus on a particular void to fill within your niche while filling a financial void across the board doesn’t spread you too thin.

3. Retailing isn’t the main business: Profits from Costco’s membership fees, not its product sales, constitute the majority of earnings. Over two-thirds of operating income is generated from annual fees, making the company more of a subscription club than a retailer Opens a New Window.

Annual net income. Since earnings are tied to steady membership fees, Costco’s profits aren’t as volatile as those of traditional retailers. Data source: Costco financial filings.

This proves to me that “pyramid schemes” are indeed LEGAL. The network marketing industry get so much unfair biased scrutiny of being labeled pyramid schemes staying in business by recruiting more than selling a product. The only difference between Costco and network marketing is — you have a CEO being paid more than you as an employee.

Don’t get me wrong, Costco has a great business model, I just find it ironic that when 99ers refer network marketing to pyramid schemes who work or even shop at places like Costco, my reply usually be —

“It takes one to know one.”

4. Side businesses mean big business: Costco’s ancillary business, including gas stations, pharmacy, and food court, accounts for a hefty 16% of all revenue . If judged as a stand-alone enterprise, this group would rank No. 164 on the Fortune 500 list, just ahead of Goodyear.

Do you have side businesses that compliment your main network marketing business in synergy? In other words, network marketing doesn’t have to be your ONLY business. Due to tax advantages you have as a business owner executive, network marketing makes it much easier (and profitable) to expand in MUSOIs.

5. An organic food giant: From a standing start a few years ago, Costco’s organic food business has spiked to over $4 billion a year. The niche has been an ideal application of the retailer’s powerful business model. A no-frills selling approach has allowed it to drive down prices while stealing share from higher-service providers. like Whole Foods .

The wellness industry is exploding due to the health craze that spread across the country in the past decade. Many network marketing companies have taken advantage of that demand and sharing this profitable wave to their associates and business partners. How much percentage of wellness and organic products make up your portfolio?

6. Market-thumping traffic growth: Costco’s customer traffic has been rising at an incredible 4% annual pace for seven straight years now. Wal-Mart last booked just a 1% uptick on that metric and Target’s first-quarter number was flat. That huge gap helps power market-beating sales growth. for Costco that, in turn, keeps membership rolls churning higher.

Traffic is important in network marketing. Even though in reputable companies product sales are a stable to your financial success in this business, you also need traffic too. This traffic requires word-of-mouth and social media sharing which can turn into healthy sales. Just like Costco, healthy traffic keeps memberships rolling in the dough for you higher. Memberships buys your products.

7. E-commerce challenges: Its online operations account for a solid 3% of sales and span six countries — the U.S., Canada, the U.K., Mexico, Korea, and Taiwan. Like most retailers, Costco sees a big opportunity online. Yet the business has unique challenges in that department Opens a New Window. . For example, a small store footprint means that it isn’t easy to use the buy-online, pick-up-in-store strategies that have worked so well for companies like Wal-Mart and Home Depot.

One of the main advantages of network marketing is leveraging e-commerce, thus increasing profit margins for their associates. Due to word-of-mouth marketing, e-commerce makes up almost 90 percent of network marketing sales. Due to technology, small store and brick-and-mortar presence could usually spell an early disaster for the most business owners.

8. Making shareholders feel special: Costco’s dividend commitment is small compared to that of rivals. It pays out less than one-third of earnings to shareholders, while Target and Wal-Mart are both closer to 50%. However, Costco has made a habit out of goosing its cash returns through special dividends with a $7 per share payout in 2013 and $5 per share bonanza last year.

If you’re not a shareholder of Costco (where you really see healthy returns per quarter as a dividend), then don’t worry, you can still be a shareholder of your network marketing business. Most initial investments starts as little as $30 which, if done correctly depending on the compensation plan, could yield you thousands if not millions in annual dividends per quarter. And want to talk about a special shareholder: how about in a magical existence somewhere, you’re earning 6 percent on all business volume on your team at unlimited depth?* And all you invested was just $30.

Talk about special.

9. A fee hike is coming: Membership fees haven’t risen from the current $55 annual charge since January 2012. Costco traditionally increases its fee every five to six years, which implies that subscribers will see their rates creep up sometime in 2017. That prospect has investors salivating at the profit boost it will generate, since so much of the fee translates directly to the bottom line.

And you know the funny thing about that? Most of their customers aren’t putting up a protest.

It’s important that you understand the bold part above, and the last part underlined; “a fee hike is coming”, and how many customers of Costco don’t mind paying $55 on a business model they won’t financially benefit from at all. In other words; their shopping at Costco is more of an expense than an investment. To put it more simpler:

They won’t see a dividends check that would give them their $55 return plus profit. But lo and behold they will justify and defend the reason they pay that $55 plus buy in bulk — versus paying a $30 annual membership to make 6 percent on all business volume on their team at unlimited depth.

Costco has a very intelligent business model; membership fees maintain the business’s survival. That means Costco need your membership in order to stay in business.

In a healthy LEGAL network marketing company, you need PRODUCTS to sale in order to survive. Network marketing doesn’t need your membership money, it’s only there to weed out those who see short term instant gratifications and only want to remain 99er consumers. However without selling products, what’s the point of network marketing being in business in the first place?

Source credit: FoxBusiness.com

THE SPOTLIGHT

*These customers don’t make a residual income when they preach the gospel of Costco to their friends and family. Same thing goes for Sam’s Club and BJ’s. So be prepared for the irony and contradiction when they think it’s “hard work” to share a network marketing business the same way.

And this is most important: don’t take it personal.

Costco sells in bulk. Most of their customers either buy based on providing for a huge household, or a small business. However the main point I want to make here is the similarity between these wholesale retailers (which is actually an oxymoron by the way) and network marketing.

(How do you buy at wholesale and retailing at the same time? Just wondering.)

I don’t have issues with people shopping at these places, I do want to clarify the difference of industries based on knee-jerk reactions related to these industries and those who used their brains to research. Because having their intelligence insulted based on others opinions and emotions is truly, well — an insult.

I mentioned that Costco as well as Sam’s Club and BJ’s are legal pyramid schemes. Nothing wrong with that, Costco is very successful with this business model and their customers agree — which is why they shop there.

Allow me to elaborate on the word “scheme”. Scheme is a plan, or executing a plan. When you go to work, you’ve schemed a way to get there. You scheme when you determine your budget. A quarterback chooses the best scheme to get his team to the end zone. Scheming=plan or planning.

But I want to direct this to those in network marketing.

I mentioned earlier that those who accuse network marketing as being a pyramid scheme, I often reply ‘it takes one to know one’ because it’s not like you can tell people ‘working 9-to-5 on minimum wage is slavery’ and claim you’re free at the same time. That’s oxymoron. For if you’re truly free, how would you know what slavery is?

It all boils down to the state of mind. According to Fox Business, Costco makes their lion share from membership fees. Period.

According to myself, and countless other Americans in network marketing, a good network marketing company depends on the quality of their products to stay in business. Period.

If your network marketing company depends solely on membership recruitment, maybe it’s best they leave the network marketing industry and become another Costco. Because when it comes to “pyramid schemes”, at least the 99ers wouldn’t prove you wrong anymore.

 

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