Costco makes more than half its profit from membership sales, meaning that the warehouse retailer's core job is keeping members happy.
If the chain delivers strong value and a positive shopping experience, customers will continue to feel good about paying $60 for a Gold Membership or $120 for an Executive Membership, which comes with 2% cash back up to $1,000 a year.
The system works: During the chain's fiscal fourth quarter ended Sept. 3, the renewal rate in the U.S. and Canada ticked up 0.1 percentage point to 92.7%. Renewal rates are a major sign of customer satisfaction, and Costco (COST) -) members seem very pleased.
Related: Costco members get some bad holiday news
Costco also has been steadily adding to its membership base and growing the percentage of its members who upgrade to an Executive Membership
"We ended [the] fourth quarter with 71 million paid household members, up 7.9% versus a year ago; and 127.9 million cardholders, up 7.6%," Chief Financial Officer Richard Galanti said during the fourth-quarter-earnings call.
He added: "At fourth-quarter-end we had 32.3 million paid Executive Memberships, an increase of 981,000 during the 17 weeks since Q3-end." That's an increase of more than 3%.
Executive members are about 45% of the warehouse club's paid membership, but they account for roughly 73% of the chain's global sales.
The chain's steady growth and continually strong renewal rates raise the question of when it will raise membership rates. That's on people's minds even more because Costco is outside the window when it traditionally has raised prices.
Image source: Brooks Kraft LLC/Corbis via Getty Images
Costco's CFO says an increase is coming
A membership-price hike isn't a small thing for Costco given the sheer size of its customer base. A $5, or 8.3%, increase to its Gold Membership and a $10, or 12%, increase for Executive Members would produce about $1 billion in new revenue with no cost associated to it.
That revenue figure is a hard number to pass up, given that historically Costco has not seen a meaningful impact on its membership base when it raises prices.
The chain also has rolling renewals that take place all year based on when people joined. That gives the company time to adjust if renewal rates fall in the month or two after an increase.
Galanti has been asked every quarter for roughly two years about whether the chain planned an increase. He has been both honest and evasive.
"Well, you know, my pat answer, of course, is it's a question of when, not if. You know, it's a little longer this time around since June of '17. So, we're six years into it. And — but, you know, you'll see it happen at some point," he said.
Essentially, Galanti has said that Costco plans to raise its membership rates, but it will not commit to an exact timetable.
"We feel good, needless to say, about all the attributes of member loyalty and member growth," he said.
"And frankly, you know, in terms of looking at the values that we provided our members, we continue to increase those at certainly a greater amount than even more than if and when an increase occurs."
But, with the holiday coming up (a period where a lot of Costco members face renewal), the chain won't be raising its membership prices. Call it an unexpected holiday gift for members.
Costco CFO pushes executive membership
Galanti also shared some insight into why Executive Membership has grown and how it has helped the company.
"I think we, over time, we've done a better job of communicating the value of the Executive Membership," he said.
The CFO has noticed a change in customer behavior and a pattern as to how regular members move into the more expensive membership.
"So, we clearly get more people to sign up that way in advance. And we see that over time a regular member over the first few years will buy more every year and the executive member starts at a higher level and will buy more every year from that higher level," he said.
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