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The Customer-Funded Business: Start, Finance, or Grow Your Company with Your Customers' Cash by John Mullins

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4Ask for the Cash: Pay-in-Advance Models

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My daughter's family shops at Costco from time to time. But not just anyone can. To shop at Costco, you'll need to become a member, and to become a member, you'll have to pay, from $55 to $110 in the United States or from £24 to £66 in the UK.1 Why on earth would anyone pay to shop in a store? We willingly pay for what we pile into our shopping cart, but do we ever pay for the privilege of shopping in somebody's store? At Costco we do. Why?

Millions of families are willing to pay to shop at Costco because of the benefits they get in return:

  • Rock-bottom prices—they save enough to more than pay for the annual membership fee
  • Huge selection—everything from food to apparel to consumer electronics
  • And the eye-opening treasure hunt that any visit to Costco brings, due to their ever-changing assortment. Live Maine lobsters one week, electric pianos the next, and always well priced.

What Costco has shrewdly figured out is that by asking its customers to pay in advance for the privilege of shopping at Costco, the company can earn enough on the membership fees alone—some two-thirds of operating profit in most years—that it can run the business on gross profit margins much lower than those of any of its competitors.2 Costco's pay-in-advance model funds rapid growth, too, having enabled ...

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