My wife’s favorite holiday is Halloween. As such, we were in the market for a life-sized skeleton for the house. We also recently became Costco members, so that seemed the natural place to get some discount decorations. We purchased some (I mean a lot) of Halloween candy there, but didn’t pull the trigger on Costco’s skeleton, which was priced at $42.99.
And it turns out that was a good thing! The next day we were at Home Depot and found essentially the exact same skeleton. And Home Depot’s was $10 less at $32.98.
What gives? The entire principle behind Costco’s membership model is that it can bring, according to its website, not only “the best possible prices” but “the lowest possible prices.” As we found out this Halloween season, that doesn’t always hold true.
There is an assumption that certain low-cost providers (think Costco, Amazon, Target, or Walmart, for example) must necessarily have the lowest prices on a given item. However, that assumption is often false, whether you are shopping for a posable battery-powered skeleton with glowing LED eyes or something a little more mundane.
The flip side is also true: Whole Foods no longer deserves the moniker “Whole Paycheck” because on many items their prices are competitive with or lower than those at discount supermarkets.Brands count on customers being sticky and not comparison shopping for every single item. The presence of a membership fee makes that stickiness even truer. This is due both to the sunk cost fallacy and cognitive dissonance.
With the sunk cost fallacy, customers take into account the cost of the membership fee when making purchases down the line. If you’ve already paid for special access to a store, you might as well use it, right?
Unfortunately, no. Once you’ve paid the membership fee, that cost should no longer be part of your buying calculus. Having paid for a Costco membership doesn’t make the $10 difference disappear.
Cognitive dissonance also comes into play because customers don’t want to simultaneously believe that they paid in advance for lower prices at a membership store and that the store they paid to access doesn’t actually have lower prices. Better to ignore that dissonance than have to think more critically about the membership cost or each purchasing decision.
Demonstrate the Value
Does that mean that membership stores are a bad idea? Not at all. Oftentimes, they do have lower prices for comparable goods than other vendors. And it’s a major convenience to use the heuristic that such a place always has the lowest prices even if that almost certainly cannot always be true. It is worth some amount of money not to expend the time and mental energy comparison shopping every item.
So, a membership site doesn’t have to be the absolute cheapest on every item, but should be in the ballpark. With enough counterexamples, however, customers will increasingly shop around. They might cancel their membership or churn out when it comes to renew.
What does this mean for companies? Memberships can be great tools, if the value that such memberships provide is clear and demonstrable.
Assuming “lock-in” is dangerous when there are clear alternatives for the consumer. If Walmart starts to offer more attractive prices and shipping terms on the same items that Amazon sells, an Amazon Prime user will reconsider their default eCommerce site. As with subscriptions, memberships require a continuous demonstration of their value to keep customers on board.
Another way around churn is having items that cannot be found elsewhere. Costco does this with some electronics. Amazon has its own brand items. Netflix has poured huge amounts of money into producing its own shows and films. So has Amazon. Streaming services in particular are fragmenting, with Disney pulling back most of its materials for its own Disney+ proprietary subscription service.
As always, it comes back to value. We’ll keep the Costco membership for other goods for now and forgive them for the overpriced skeleton. The one we bought at Home Depot.