The Revenue You Don't Take

Abstract

Costco runs a rule that ought to be impossible: a hard ceiling on markup. Roughly fourteen percent on branded merchandise, around fifteen on its own Kirkland Signature line. Not a target, not a guideline — a ceiling. When the company's costs fall, the price on the shelf falls too, because the ceiling is expressed as a maximum over cost and there is nowhere for the surplus to go. Jim Sinegal, who ran the company for decades, told the story more than once about being pressed on why a product selling well at a good price shouldn't simply be priced higher, and the answer never varied: because the ceiling is the ceiling. The company also caps the number of items it stocks — a few thousand SKUs against a supermarket's tens of thousands — which is a second restraint most people never read as one. Fewer choices means every item has to earn its slot on price and quality rather than on slotting fees paid by a supplier.