Costco-resized-600There was a great article in the Motley Fool (“Five Companies That Know Why They’re Great,” by Matt Koppenheffer) that mentioned five companies that have done a great job of identifying and capitalizing on their competitive advantages. This article offers several ideal examples of how these high-performing companies have honed in on what truly makes them great, and have trumpeted their greatness to the marketplace in a way that keeps buyers coming back again and again.

One of the companies on the Fool’s list was Costco, which was also one of the companies written about in Creating Competitive Advantage. Costco is a discount warehouse retailer, and their #1 competitor is Sam’s Club, owned by Walmart. Even though Walmart is the 800-pound gorilla of retail, Costco has bigger sales and profits than Sam’s Club.

How do they do it? After all, retail is a price-driven business, right? No one can possibly compete with Walmart, right?

Wrong. Costco competes with (and beats) Walmart not by strictly competing on price, but by offering a highly targeted and refined shopping experience. Here is how Costco “knows they’re great,” and how they have structured their business operations around their key strengths:

1) Know your customer: Costco goes after a certain type of customer: small business owners who are status conscious and who have money to spend on bargain-priced premium items like Dom Perignon champagne, luxury watches and tech gadgets. The reason why Costco decided to focus on small business owners is that they realized that these people are often some of the wealthiest people in their communities: they have successful businesses, they want to buy good stuff, but they don’t want to spend a lot of money. Of course, not every Costco shopper is an entrepreneur, but this customer base has remained the focus of the Costco marketing effort. Even the Costco members’ magazine includes many articles offering small business advice.

2) Deliver bigger value, not just lower prices: Costco doesn’t just offer low prices, it offers exceptional bargains on elegant, sophisticated products that people really want to buy. Costco is not just a mass market retailer; instead they’re a curator of high-value offerings, priced at a discount. Most of the Costco members who I know don’t shop there for cheap prices, they shop there for the awesome merchandise and the limited-time-only “treasure hunts.” Whether it’s imported Italian leather sofas or designer clothing or high-end kitchen equipment or killer deals on flat screen TVs, people are often pleasantly surprised by what they find on sale at Costco.

3) Treat customer service as an investment, not a cost to be shed: Costco has been criticized by some Wall Street analysts for their high labor costs – and Costco does pay their employees quite well. But this is not a blind spot on the part of Costco’s executives, it’s a strategy. Costco delivers excellent service. Everyone in the checkout lines at Costco tends to be smart, personable and “on the ball.” Costco employees go out of their way to hustle, to find items that customers couldn’t locate, or point people in the direction of the latest deal. It’s hard to find good customer service these days, but Costco delivers it.

Even in a price-cutting business like retail, there are ways to compete (and win) without focusing solely on price. Costco offers a different model for success in retail.

What could your business learn from Costco? Do you know your customers well enough, and are you focusing on the right kind of customer? Are you giving your customers the experience of a dim, dreary warehouse, or a dazzling array of “treasure hunts?”

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