Question

Sam’s Club and Costco have membership fees. Once the fee is paid, the member can buy products from these stores at relatively lows prices. What type of pricing are the managers of these stores using? How should Costco and Sam’s Club managers set the prices of the products they sell?

Answer 1

This type of business strategy is known as subscription pricing model where the customers who want to shop at the store must buy a membership in order to do so. Membership runs at certain Dollars per year at the time of writing ,making up for their costs caused by offering customers lower wholesale prices of the of the goods sold.

In the above example the store managers are using captive pricing as once the customer has bought a membership with the company they will purchase goods from the same company every month which will help them to increase their sales and form a dedicated customer base.

The main features of this pricing strategy that should be used by Costco and Sam's club are as follows :-

1) the service that Costco provides should should utilise its ability to use economies of scale in order to bulk buy large quantities of goods and low prices in order to sell them back to customers for cheaper prices.

2) the Costco should permanently cap it's margins in order to ensure that members can justify paying for a membership.

3) Costco should keep lower profit margin in comparison to other organisations in order to keep the prices of the goods lower therefore inducing more and more customers to buy from their stores.

4) this type of organisations produce mouth advertising instead of sending out weekly flyers.

5) the company should follow hire employee wages policy in order to reduce employee turnover which will save the cost of of training new employees.