Costco Membership Crackdowns Fail Loyal Customers

 What happens when a routine customer experience is disrupted for the worse? DeAnn speaks about her recent shopping trip and her experience with the Costco membership card which left her with many questions on customer experience design, customer flow disruptions, and customer engagement. Is a crackdown good for customers?

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Anchor

Introduction – Costco Membership

Costco has been a worldwide success since opening its first location almost 40 years ago. Focusing on value through bulk purchases, the American multinational corporation currently operates in 14 countries and employs more than 300,000 people worldwide. It ranked fifth in the most recent National Retailer Federation survey in 2022 superseded only by Walmart, Amazon.com, Scrwartz Group, and Aldi. On the same list, it ranked eighth overall in revenue at US$46.76 billion in 2022.

As a members-only retailer, flashing the Costco membership card at the entrance is a norm. CNBC speaks about what a Costco membership brings and why the brand is so successful.

As of June 2023, Costco operates 853 warehouses, including 587 in the United States and Puerto Rico, 107 in Canada, 40 in Mexico, 32 in Japan, 29 in the United Kingdom, 18 in Korea, 14 in Taiwan, 14 in Australia, four in Spain, three in China, two in France, and one each in Iceland, New Zealand and Sweden. Costco also operates e-commerce sites in the U.S., Canada, the United Kingdom, Mexico, Korea, Taiwan, Japan, and Australia. The company expects to continue growing its footprint and Costco membership base at a slower pace in 2023-2024.

A Costco membership is something many households have in North America. Its membership growth has been a big success story with a greater than 38% uptick over 6 years owing to a larger footprint and higher consumer interest in lower per-unit pricing.

Costco membership growth from 2017 to 2023 – Over the 6-year period, Costco membership growth is a staggering 38%. (Source: Costco, Retail Mashup)

There are generally two types of Costco memberships, Gold Star (US$60/year) and Executive (US$120/year). Many people bring friends and family to the warehouses to buy products. While it goes against Costco membership privileges and conditions, some members go further and share the card with friends without issues previously. The Costco membership fee hasn’t changed since 2017. This might change in 2024.

Transcript

Welcome

DeAnn/Larry
Hi. Welcome to Retail Mashup. I’m DeAnm. I’m Larry. This is a podcast where we find those intersections between customer experience and the retail industry.

Costco Membership – Asked to Show ID at the Wrong Time

DeAnn
For your listening pleasure, what are we talking about today? I was in Costco last weekend. My husband and I, are very accustomed to being asked to show ID when you go into Costco. It’s for members only. We get it. So we happily fish our ID out of our wallets and show them our ID when we walk into the store. We did our usual shopping trip. Spent about an hour and had way too much stuff in our cart. We get up to the self-checkout and a gentleman comes up to us and asks to see our ID card again.

Costco membership comes in two forms (see video): Gold Star and Executive. Source: Costco

Very confusing. He didn’t identify himself as an employee. He was wearing a Costco vest, but we didn’t notice that at first because the shirt he was wearing was the same color as the vest. So it wasn’t something that you normally, “oh, there’s an employee.” It was just some random guy.

“Can I see your ID?” It was very off-putting and kind of irritating. It interrupted our flow because we were standing in line, ready to go up for our turn to check out, which we’re very used to. Suddenly we have to fish our wallets out again and show him the id.

Costco Membership Crackdown

Chatting with him about it, it seems that Costco is trying to crack down on increasing fraud where people are sharing their membership cards with other non-members at the point of checkout. It bothered me that this is their response. It’s kind of like Netflix cracking down on shared viewership while Costco’s doing the same thing.

And I get it. They make an awful lot of money on memberships – over US$4 billion a year in membership. When they sell close to US$230 billion worth of products, but on that US$230 billion of product, they only make about US$5 billion in profit. I’m throwing a lot of numbers out here.

The US$4 billion revenue from the memberships, that’s a hundred percent profit. So they are very protective of the memberships. They consider themselves a membership company more than a product retailer. I get that, but it’s the timing and the execution of it that seemed like it was very reactive, not proactive.

Costco membership crackdown as reported by KTLA 5

So, you’re already checking my ID at the entrance when I walk in. I’m used to that. I understand that it makes sense to only allow members into the building. Once you’re in the building, how you treat that member is really important. Why not beef up the check at the entryway instead of having a second check?

So you can’t even get into the building unless you’re covered under a card. You know, my husband and I have a family membership, so the two of us use the same card. Great. But I do have my card. Maybe everybody in the family needs a card and they all have to flash it at the entrance.

Using Technology to Manage Membership Cheats

Their face has to match the face on the card. That’s easy with technology to do and a camera artificial intelligence scan, whatever. It is not a problem and it’s very understandable to do when you walk in. Any other time, all you’re doing is disrupting the customer journey to a point that’s irritating. Checkout is the last point of contact that you’re gonna have with your customer.

It needs to be a positive experience. I know that this is normally done at their regular checkouts, but self-checkout has been around for more than five years, and this is the first time it’s happened. It’s something that I just felt like they missed the boat.

They handled it badly and the customer experience took a big hit because of this.

The Discussion

Customer Expectations and Feeling Betrayed

DeAnn and Larry
I look forward to the customer surveys being done regularly. I hope there is a particular line item for people to speak out in this particular aspect of the experience. The Costco membership checking has been on the news cycle a little bit lately and it will continue to play out in a magnified fashion because it’s a very disruptive process.

Now for those listeners who do not have a Costco membership, the Costco membership card has not changed its design in many years. The front of the card is a big Costco logo. Then depending on the card, whether or not you’re a standard member or an executive member, you pay different fees.

But the back of the card is where you have the barcode and also a picture of yourself. That picture is typically attached to the person who owns the account. So if you have two people sharing the account, chances are you only have one picture and not two different pictures. Part of what they’re trying to crack down is they’re hoping that people who are using the same Costco account.

When they check the membership card, they don’t check the back of the card for your picture to make sure you authenticate against the card. And that has not expired, but they just check the card to make sure that you have a card.

That was a very interesting process because like you said, the end self-checkout has been in many US warehouses for many years and they’re just being introduced in other parts of the world. This process did not have a lot of information or education in advance.

Costco’s Entices shoppers with great prices // Costco’s mobile application (Image: Costco)

People did not realize that they would have to recheck the membership card. In some cases maybe they are sharing. But rather than delighting the customer. They are almost punishing, shaming the customer, and making people feel bad if they are using the card wrongly.

Many families have one account and they wouldn’t know that. What if the picture does not match? Then what? They have never considered it and they were never told what the consequences are.

Customer Experience Disruption and Redesign

Like you said, at the tail end of the customer experience only at checkout. You, you could be spending hundreds if not thousands of dollars just to be potentially turned down for using the wrong card. That’s an experience that people will not forget.

Well, what a lot of people don’t understand either is you don’t have to be a member to buy something from Costco. You have to be a member to get the discounted rate at Costco. If you go in and make a purchase, you have to get permission to go in. But you can get a guest pass And it doesn’t give you membership pricing. They will attach an extra fee to your checkout bill at the end.

So it seems like this would’ve been, a great way to increase membership. Instead of policing the situation at the front, make it part of the checkout experience and have a few extra employees.

Design Interactions That Delights Over Punishes

That’s one thing I love about Costco’s self-checkout they’re not completely self. They put a fair number of staff at the checkout. Each staff member handles two or if it’s not busy, maybe three self-checkouts.

Before you even have time to think about it, somebody is there with their scan gun to scan your heavy stuff, so you don’t even have to think about it. so why not extend that? Maybe staff up a little bit longer if you’re gonna change policies and have them just scan your card. You have to scan your card anyways.

Let them scan your card for you and just very quietly check the image. If it doesn’t match, ask about it. “Is this your account? Not a problem if it isn’t. we have to charge you the extra fee. And if you’d like to get a membership, we can do that for you right now.”

Positive Experiences

Make it a positive experience. And like you said, don’t shame them. Are you gonna turn down that thousand dollars purchase or $500 purchase and miss out on an opportunity to sign up a potential new member? Just because you wanna. Be the police.

When people have bad experiences, the trauma may stay with them and they likely would tell others about their experiences. They may not tell them the entire story, where they may have used the wrong card, they didn’t use a card, or they purposely tried to deceive by using other people’s cards, but they may not tell the entire story.

They would just say, Costco policed me in such a way that made me feel uncomfortable. They belittled me on the rules and I did not know because maybe I was told that I could do this and I did not realize that I couldn’t.

And everybody has their circumstances. The goal to resolve Things like this is not necessarily to cause punishment or the feeling of being punished, but it’s actually to create a new delight.

The actual purchases are where they make the bulk of the revenue. Why would you say no to those purchases? If it’s about membership, then there are many ways around it to engage and acquire new customers.

I think brands who are trying to crack down on membership abuse, should think about, why customers want to game the system in the first place. Is it because it was designed for it to be gamed to be taken advantage of? And what would be ways to educate, and build awareness to stop that practice if it hurts your revenue, product, or profit?

Costco membership crackdown – Design with delight over punishment in mind can yield better results in consumer sentiments and marketplace acceptance. Source: Karolina Grabowska at Pexels

It’s not about making or highlighting one person who’s doing something bad, you are telling the entire membership that any wrong move and you could be scalded, you could be treated badly, and that’s not the type of feeling you want the entire membership to feel.

Yeah. And one thing Costco needs to put itself in the headspace of its customers, cuz some of them may have been doing this for years. Yeah. It’s just become a habit. It’s ingrained behavior. So suddenly cutting it off abruptly and rudely not only alienate that person.

Now you can be sure they’re never gonna take out a Costco membership because you’ve embarrassed them. The person whose membership they borrowed is embarrassed and they’re probably never gonna go back to your store either.

So solving that problem with a negative, instead of using it as an opportunity to grow your membership to gently ease people into this new behavior, to give them a couple of warnings to say, “You know, don’t worry about it this time. just know that we’ve started cracking down on people doubling up on the card. So the next time you come in, just come see us.

We’ll get you hooked up with your own membership card. It’s not a problem. Today, you know, just go ahead and make your purchase. I’ll do an override and you’re good to go.”

It seems like a carrot would be a lot more effective than a stick.

That’s a perfect way to end the episode. If you like this episode, please like to subscribe to retail mashup, and we will talk to you next time. Thanks, Larry.

* We made some modifications to the transcript to improve understandability and flow.

Costco’s Response to the Crackdown
“Our membership policy states that our membership cards are not transferable and since expanding our self-service checkout, we’ve noticed that non-member shoppers have been using membership cards that do not belong to them,” Costco said in a statement. “We don’t feel it’s right that nonmembers receive the same benefits and pricing as our members.”

Costco membership crackdown – additional analysis and company response. Source: Good Morning America

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