A business model is the realisation of its strategy (Casadesus-Masanell & Ricart, 2010) and it defines how the firm creates and capture value as well as its internal source of advantage (Brink & Holmen, 2009).
Costco adopts high sales volume paired with quick inventory as its business model. To ensure this, Costco offers low prices on limited product selection among a wide range of branded and private label products. Costco combines rapid inventory turnover with low operating costs by bulk purchasing, efficient distribution, and reduced handling of products in their self-service warehouse facilities helps Costco profit at a significantly lower margin as compared to other traditional supermarkets, wholesalers, mass merchandisers and etcetera.
A business model is assessed based on its customer value proposition and its profit formula. The customer value proposition is defined as the sum of benefits a buyer would receive in return for the payment given to the seller. Costco, as a warehouse club, sells its items at lower prices compared to its competitors. This is achieved by setting a maximum product mark up of 14 percent when other supermarkets and discounters are marking up from 20 percent to 50 percent. Costco also seeks to provide value through its own private label called Kirlkland Signature which are made to be of the same level of quality or better than national brands while pricing them about 20 percent below name brand items. Other than that, Costco sets up additional services or vendors inside next to Costco warehouses in order to provide customers with more value as well as attract customers to come back more frequently. One such example would be gas stations that sell gas at discounted prices only for Costco members. Another example of a unique service that Costco offers to its members is the 1-Hour photo center which offers to convert video tapes, film reels or slides to DVD.
Another value proposition at Costco is its treasure-hunt merchandising...