Forget 30-roll packages of toilet paper. For two days in mid-April, members of Costco Wholesale could buy a beautiful she shed (or he shed) at a discount of $7,000, and then have it shipped directly to them.
Which raises the question: Wow, Costco, what’s Next?
This is the literal question regarding Costco’s direct-to-consumer program (DTC), Costco Next. Launched in 2017, Next gives Costco’s millions of members access to very-limited-time deals on goods, including bathroom vanities, beauty products, gym equipment and luggage, directly from the vendors – at Costco prices. And at no additional membership cost. (Note: Because these deals last only a few days, the links to the offers, such as the above she shed, expire with the offers.)
Sam’s Club offers similar DTC options in travel and entertainment. Members can, for example, get exclusive prices on vacation packages direct from venues such as Universal Orlando Resorts.
Yet many people, including members, aren’t aware these programs exist. Looking at Costco Next, plenty of reasons explain why it operates on the downlow.
How Costco Next Works, In 3 Clicks
The structure of Costco Next is simple: Explore the Costco Next site for deals, select a product supplier, and then enter your name and membership number. This unlocks access to the supplier’s site and the specific deal, with exclusive Costco member pricing.
In mid-April, the Next website featured more than 50 brands, including Priority Bicycles (electric), Viking kitchenware and Bower & Branch fruit trees. Each retailer manages its own offers and terms.
Costco, meanwhile, provides its members one more value-add for their annual fees of $60, which have not risen since 2017. It is in fact widely expected the retailer will raise the fee this year, Yahoo! reports. This may be why Costco Next has been expanding its vendor offerings (in August, 2022, Kiplinger counted 41 brands on the site).
There’s also mounting competition. In 2023, online searches for DTC products are expected to rise by 6%, according to a recent survey by software company Circuit for Teams. One in 10 business owners plan to switch to a DTC model in 2023, the study found.
Best, Next Practices
The real, real reason Costco doesn’t promote Costco Next, however, is that the warehouse club just doesn’t market much of anything. The company, with 585 U.S. locations, has no advertising budget. By comparison, Walmart spent $3.2 billion in advertising in 2021, according to Investopedia.
Costco instead relies on its memberships and rotating selection of deals to do the selling for it, often through social media (word of mouth). Costco Next benefits similarly from this fear of missing out.
Here’s what other retailers and brands can take away from its low-key partnerships:
A new entry into select data. Costco members who use Costco Next are likely to spend a lot of time on its site. When these members enter a branded deal on Next, after sharing their names and membership numbers, they reveal possible product interests that can inform Costco as well as its online advertising partners. Further, at least some Costco Next vendors share order and shipping details with the retailer.
Customer engagement. Nearly 60% of business leaders say the biggest benefit of switching to a DTC format is having a better relationship with their customers, according to research by Circuit for Teams. This is due, partly, to instant-feedback mechanisms built into the model. Costco, as the host of Next, stands to deepen and prolong membership activity by giving customers a compelling channel to explore and bridge back to Costco’s main site.
It’s easy money. Costco Wholesale receives compensation for each purchase its members make at one of its Costco Next partner brands, according to a review of several of its member “transfer” policies (applied when members transfer to a supplier’s site). Costco does not detail terms of partner deals in its annual report or conference calls.
It’s not driving the truck. Costco is off the hook when it comes to fulfilling orders through Next. It does not carry inventory for Costco Next suppliers; it simply refers members to suppliers’ websites, according to its “How it works” page. The Costco Next supplier is responsible for handling all shipping and returns.
It makes customer service easy. Because Costco Next does not involve itself with vendor fulfillment, it has a logical reason to step outside of customer service issues, as well. Instead, the Costco Next website provides a link through which members can access an alphabetized directory of every vendor’s customer service website and toll-free phone number, along with hours.
It’s margin friendly. Costco Next purchases do not qualify for the benefits available to its higher-level Costco Executive members, who pay $120 a year. Specifically, its estimated 30.6 million Executive members do not receive the 2% rewards on Next purchases that they get on other Costco buys (up to $1,000 a year). Considering that many of the Next deals are big-ticket, this prevents Costco from having to write down a considerable sum of give-backs and reduces the number of maxed-out perks.
No Fear Of Missing Out On What’s Next
Chances are that by now, the she shed on Costco Next in mid-April has been replaced with a different limited-time deal. What will be next? Probably more brands, deals and traffic to the site. More word-of-mouth. More memberships.
If Costco does raise its fees this year, Next will be a very good selling point. Once members, and prospective members, know about it.
This article originally appeared in Forbes.