🧠 Wild ways COSTCO uses psychology to sell

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Hi there - Jen here :)

Costco is the fourth-largest retailer in the world, behind only Walmart, Amazon, and CVS. It brought in a staggering $245 billion last year.

That’s pretty impressive given how counter-intuitive Costco’s business model is:

• It requires a paid membership to shop

• The store experience is best described as “bare bones”

• Most products are sold in bulk - aka laughably large amounts

So how did Costco get so big?

It’s down their use of behavioral science and marketing psychology - used consciously, or not.

Today you’ll learn:

• The psychology principles that power Costco

• Why Costco customers spend more

• How confusing customers actually works for Costco’s bottom line - not against it

• How you can apply marketing psychology and behavioral science like Costco

👉 But before we get started:

On May 10th, I’m holding a free virtual workshop, “Introduction to Buyer Psychology.”

This workshop will introduce you to fascinating concepts, bust marketing myths, and help your brand grow (all with the power of psychology, behavioral science, and AI).

👉 Click here to sign up.

(Don’t worry, I’ll send out a replay video to everyone if you can’t make it to the live workshop.)

Scarcity & Sampling: The psychology principles that power Costco

To shop at Costco, you have to be a member.

For between $60 and $120, you unlock the ability to shop in its stores.

But why would people want to pay to shop when they could visit any other store for free?

Because memberships give Costco’s deals a feeling of scarcity.

People feel special because they’re getting exclusive sales not available to general public.

They pay for Costco memberships because they don’t want to miss out on deals that other people can get.

Studies tells us that people hate to lose out - it’s a powerful behavioral tendency called Loss Aversion.

In fact, the psychological pain of losing something is twice as powerful as the joy of gaining the exact same thing.

The psychological power of free samples

If you’ve ever visited a Costco, you’ve probably noticed their sample booths dotted around the store — usually with a big line of people waiting to grab a free bite.

@mrs.shewolf34

Costco had so many samples out this weekend. What was on the menu? #costcosamples #costcofinds #costcomusthaves #costcosamplecheck #tiktok... See more

But why does Costco give up so much floor space to free samples when they could use it to sell products instead?

It’s because companies know that sampling drives sales. Some studies say it can drive up to 2,000% more.

The reason samples work is because of Reciprocity — the social norm of responding to a positive action (free sample) with another positive action (buying your product).

In addition to feeling indebted to return a free gift, free samples de-risk a new product purchase.

If you’ve never tried Kirkland pickled veggies before, you’re probably wary of buying a gallon of them.

But a free sample lets you try before you buy, and takes risk out of the equation.

The surprising reason Costco customers spend more

Not only does Costco make more money than its competitors overall, it also makes more money per square foot.

They make $1,638 on average. That’s more than competitors Target ($300) and Walmart ($574) make per square foot, combined.

It’s not because Costco has better products or a more attractive store.

It’s down to something called the Sunk Cost Fallacy.

This principle says that people are more likely to stick with an activity if they’ve made a significant financial or time investment.

In other words, when someone pays a Costco membership fee they want to get their money’s worth.

One study found that people who shop at club stores, like Costco, end up visiting the store more often and spending more per trip than they would if they weren’t paying for a membership.

Why Costco purposely confuses customers

If you’re a regular Costco shopper, you might notice that your favorite products move around the store a lot, and that’s on purpose.

The company rearranges the store regularly, so shoppers have to go on what Costco calls “treasure hunts” to find their favorite items.

If you’re searching for laundry detergent but aren’t sure where it is this week, you’re forced to pass by new products that Costco hopes you’ll notice and buy.

This “treasure hunt” strategy increases the salience of different products (and exposes customers to more products overall).

Salience describes how visually prominent something is.

If a product seems to jump out from its environment, it’s salient. If it blends into the background and takes a while to find, it’s not.

Costco knows when people are forced to walk past lots of new products to find their favorites, they’re more likely to notice and buy more products than they intended.

It’s also worth noting that some strategic items never move - like their famous rotisserie chickens - because Costco knows lots of people come in only to pick up a pre-cooked chicken.

The roastery is kept at the back of the store because these folks will need to walk past lots of other tempting deals to get their chickens - and likely make some impulse purchases along the way.

Costco might be the kings of using food placement strategically: Its famous $1.50 hotdog and drink combo sits right next to checkout, using last week’s Peak-end Rule strategy to perfection.

How you can apply marketing psychology and behavioral science like Costco

Costco isn’t just great at getting people to buy. Its customer experience creates brand fanatics.

What’s their secret?

Although Costco might be savvy in applying psychology and behavioral science, it never sacrifices long-term customer relationships for a short-term sneaky sale. Practices like its infamously liberal return policy, build trust and loyalty with customers.

An example? In the photo below, taken in 2024, someone is returning a TV purchased at Costco… in 2002.

If you want to use psychology like Costco, start by asking yourself a few questions:

1. Scarcity: How can we create a sense of exclusivity to increase the perceived value of our products, like Costco does with its members-only model?

2. Reciprocity: How can we use sampling to de-risk our new products? (If you want to check out some examples of doing this that don’t involve food, read this article).

3. Sunk Cost: What are some behavioral triggers or principles that can motivate people to “get their money’s worth” in our experience? If they’re already paying, how can you make sure this sunk cost is top of mind for people?

4. Treasure Hunts & Salience: How can you use the store floor (physical or digital) to encourage exploration? Starbucks did one of my favorite applications of this, when their loyalty app rewarded “menu exploration” (aka trying a drink or food item you’ve never bought before) with more stars.

Read, Watch, Listen

• Choice Hacking Conversations: A Fascinating Interview with Earl Cox, Chief Strategy Officer Emeritus at The Martin Agency [Read]

• How Starbucks Used Psychology to Become the Kings of Coffee [Watch]

• The Choice Hacking Podcast just wrapped up Season 5 but will be back for Season 6 in just a few weeks. Click to catch-up → [Listen]  

Until next time,
Jen

Want to use behavioral science, psychology, and AI to grow your business?

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