Before the first World Wide Web page was served, before Amazon Prime was a twinkle in Jeff Bezos’s eye, brick-and-mortar retailers were founding companies based on the idea of selling exclusively to subscribers. The wholesale-pricing warehouse-membership business model, invented by the perfectly named Sol Price in 1976, made membership appealing with the idea that you had to subscribe annually to get the incredible bargains available at these stores.

The market in the United States is dominated by three players: Costco, Sam’s Club, and BJ’s Wholesale Club. The success of their subscription model can be seen when you stack these retail giants up against the biggest players in retail: Costco, the fourth-largest U.S. retailer, earned $93 billion in 2017, compared with $57 billion for 11th-largest Sam’s Club, and $12 billion for 37th-largest BJ’s.

(Source: Stores; Kantar; National Retail Federation, via Statista.)

Note that the $374.8 total for Walmart includes both U.S. stores and Sam’s Clubs. If you break those pieces apart, it’s $57.4 billion for Sam’s Clubs, which still leaves Walmart in the lead, and puts Sam’s Club, considered on its own, in 11th place.

These retailers all rely on basically the same strategy: bulk buying at very low prices, with mark-ups in the 8% to 15% range. That’s enough to break even, barely. What sets these companies apart from the Wal-Marts of the world is that they also charge membership fees. This recurring revenue provides the bulk of the operating profits, and with typically high renewal rates, this revenue offers a unique and stable base for retailers operating with razor-thin margins.

Let’s take a look at each of the big three.

Costco

Writing in Forbes, Robin Lewis describes loyal Costco members as “Costcoholics.” 75 million of them pay $55 (or $110 for a premium membership) each, annually. She describes the power of the subscription model this way:

• In today’s over-stored and over-stuffed retail environment, the equivalent of almost one-fifth of the U.S. population is paying for the privilege to shop at a particular store. And this is not a one-off, let’s-see-what-it’s-like kind of visit. The renewal rate is a whopping 90 percent each year. I guess that captures the power of an addict’s behavior. Not only is 80 percent of Costco’s gross margin and 70 percent of its operating income derived from its Costcoholics’ membership fees, Costco collects most of its profits 12 months in advance, not at the eleventh hour of the fiscal year like most other retailers.

Costco’s continuing success is driven by its growing membership.

(Source: Costco, via Statista)

Costco also stands out in a few specific high-profile ways: It pays higher wages than other retailers; it brings in customers with a few famous loss leaders, such as its rotisserie chickens, and it caters to a slightly more upscale demographic.

Sam’s Club

At the start of 2019, a total of 599 Sam’s Club locations could be found in 44 states. That was the total, however, after the company closed 63 locations in 2018. Some of these stores closed with little or no notice — according to Business Insider, it was the most shocking moment of the year. Moreover, in recent years the chain has struggled with its store count, with closures in 2009, 2010, and 2014. Similarly, the company’s retail sales growth has been up and down, though more up than down:

(Source: Walmart, via Statista)

The company continues to innovate, however, in an effort to fight for first place with Costco. Recent initiatives include innovations in technology and private label brands, a new travel service, and “Sam’s Club Now,” a cashless store format. With 47 million members, the Wal-Mart division has some room for experimentation. Still, the company has not lost sight of the importance of its member base. Last year Sam’s Club created the new position of Chief Member Officer, combining membership, marketing, and member experience oversight under one leader. Reporting on the new position, Supermarket News quoted Jamie Iannone, CEO of SamsClub.com,

• Having a chief member officer is an important step as we take an increasingly member-centric approach to the business … strength in our membership offering and base is the foundation of a successful warehouse model.

BJ’s Wholesale Club

With just 216 BJ’s clubs in 16 states, this wholesale club company does not have the reach of the other two, but it still commands a loyal membership base with loyal followings among young and middle-age shoppers:

(Source: Global Consumer Survey USA II 2018 by Statista)

The company was taken private in 2011, but emerged as a public company in 2018. Reported membership totals range from 5 to 9 million. The latest company Q4 report did not specify, but according to Christopher J. Baldwin, Chairman and Chief Executive Officer,

• We ended the year with all-time high renewal rates and membership fee income. We delivered strong fourth quarter merchandise comp sales, supported by a successful holiday season.

Wider Lessons For Other Subscription Businesses

Every year, the American Customer Satisfaction Index evaluates consumer attitudes towards companies. In the retailer division, wholesale clubs top the rankings.

(Source: ACSI, via Statista.)

Three of the top five are our wholesale club retailers. And that makes sense, because as subscription-based firms, Costco, Sam’s Club, and BJ’s all have to minimize churn and maximize word-of-mouth member recruitment. On the same ranking scale, Costco beat out Amazon this year. The business model only works if members stay satisfied, and these subscription-based companies know that.

That’s the main takeaway for other businesses that depend on recurring revenue: Keep members happy. Companies that do as good a job as Costco may see members choosing to be voluntary ambassadors — Costco is infamous for needing to spend literally nothing on advertising. According to The Motley Fool,

• One of the keys to Costco’s success, and its profitability, is that the company spends next to nothing on advertising. Other than sending out direct mail to prospective members, and sending coupons to existing members, Costco does no traditional marketing at all. Costco can get away with this for one simple reason: Its memberships sell themselves. The value proposition is obvious after one trip to a Costco warehouse.

The pressure is on for number two and three. In an effort to increase membership, BJ’s allowed non-members to shop its stores last fall. And Sam’s Club is refunding its $45 membership fee for new members if they use it as a credit on in-app purchases within 30 days. These initiatives show the power of the membership model and the lengths to which retailers will go in pursuit of new subscribers.

Insider Take:

Loyal customers who are willing to pay for memberships have given Costco, Sam’s Club, and BJ’s an incredible foundation for growth. These companies are thriving with a business model that relies more on subscription fees than on very tight margins. With key renewal rates in the 80% to 90% range, these stores are expanding because customers — read “fans” — are recruiting new members by word of mouth!