John Davids (0:00)

I just dropped 320 bucks at a store that has no selection, no ads, and no consistency. And a bunch of you guys did, too. This company made $254 billion last year. I'm talking about Costco. And if you pay close attention, I'm going to teach you seven lessons straight from the Costco playbook that you can use right now to make more money while spending less money and making yourself invincible to competitors. Some of these strategies are so dangerous, all I ask is that you only use them for good foreign. You're listening to Making it with John Davids. All right, let's break down the Costco business model piece by piece, starting with the membership. Now, if you try to walk into a Costco store anywhere in the world without a membership card, you'll get turned away. You want to come in, you gotta flash that plastic. And for good reason. You see Costco's membership, but might be the most brilliant business maneuver of the last century. First off, it made $4.9 billion last year in 2024. That's pure profit. All juice, no pulp. And they've got 132 million members, which makes them one of the biggest paid subscriptions in the world. I get my membership fee back at the end of each year through my 2% rebate. A lot of people do, but even then, I've just loaned Costco 120 bucks for 12 months. And at 0% interest, that's not a bad cash flow strategy. And I'll get more into that in a minute. Tell you how you can do the same thing for your business. But first, let's talk about selection, because Costco doesn't have any. Looking for ketchup? We got you. I mean, as long as you're good with two gigantic barrels of Heinz and nothing else. You want some Mac and cheese? It's all good. Here's a 17 pound bucket. I hope you work those triceps. Look, there's a reason Costco offers one to two products in each category and no more. It's because you buy more of it. Eight different varieties of pickles might sound good, but then you get lost in choice and you actually buy nothing. So if selection is your vibe, go somewhere else. But if you want an unreasonable number of Ranch Doritos, you know where to find them. And there's something even crazier about Costco. You see, it's not just a retail giant. It's also a consumer product giant. They make a ton of products themselves. Batteries, cashews, toilet paper, wine. They've got this in house brand called Kirkland. And that brand alone made a ridiculous $67 billion last year. And that puts them in division one, right next to Unilever, Procter and Gamble. And you guys want to know how much Kirkland spends on advertising every year? You already know. They spend nothing. Not one dollar. Their customer acquisition cost is literally zero. Doesn't that sound pretty good? A $67 billion business with a CAC of zero. I kind of like that. And there's so much more weirdness to cover. You got the endless samples like bagel bites and cheese Pierogis. You've got the $1.50 hot dog and soda combo that they still managed to pull off somehow. You've got these insanely expensive things they sell, like the $39,000 bottle of Scotch or the $330,000 diamond ring. Check it out. Those things are actually sold at Costco. It's a vibe, and Costco does it well. At the end of the day, Costco leans into its brand hard. When you do one or two weird things, it looks strange, maybe even inauthentic. But when you do everything different, the questions stop. People believe you. They might like you or not like you, but they'll know that you're for real. Right? So buy in 100%. Others will follow. No half steps, no hesitation. Play your own game. Just like our friends at Costco. So I want to get deeper into the juice, and let's start with the crazy way that Costco actually makes money. You see, when they sell you a product like a bottle of olive oil or a 30 pack of socks, they typically have a small markup, somewhere like 14, 14 or 15% markup. But when they sell you a membership, the markup is infinite because the membership costs them nothing. And there's so much brilliance to this membership. Like I said, it pulled in about $4.9 billion in 2024. And that's pure profit. But it's also a huge cash cushion. You see, because Costco gets this money at the very beginning before you start shopping with them, you pay them, and your cash gives them a cushion to operate for the next 12 months, at which point you'll pay them again. Most people do. Now. Today, Costco obviously has a lot of cash. It's a public company. I think they've got something like $13 billion in cash on their balance sheet. So they're good. But let's just say, hypothetically, Costco was low on cash. The membership is the simplest, most cost effective way to. To bring money in without having to pay interest to a bank or give equity to an investor. And it's even more simple than selling a product or a service, because a membership fee is you giving them cash in exchange for nothing. Nothing at all. Just the privilege to walk in the door and start spending money at a later time. Now think about that for one second. If you're running a business and there's a way for you to bring in cash now without going to a bank, without going to an investor, and without even making or sourcing a product, that'd be a pretty great way to bring in cash right now. Most businesses can't copy and paste Costco exactly. But the principle underneath this model, the idea of getting paid up front can still be done. And there are ways to apply it to different industries. I'm going to give you three methods that you can use right now and I'll tell you where they show up at Companies in the wild. This episode is brought to you by my new tool, the 1 Minute Marketing Roadmap. Available@johndavids.com roadmap. It's a fully customized report that shows you how people are finding you online and where you're losing sales. We've packed 10 years of research at Influicity into a smart AI powered tool that delivers real results. I'll tell you things about your business you probably haven't thought of. Go to johndavids.comroad and get your custom report. That's johndavids.com roadmap. The first method is what I call prepay to play, and this one is really simple to implement. So if you've ever signed up for software like Slack or Notion, Zoom, Dropbox, Salesforce, whatever, you'll notice they always give you two price options. One price is if you pay monthly and the lower price is if you pay for the full year upfront. And maybe there's a 10 or 20 20% savings. We're so used to seeing this that it doesn't even click. But think about how much cash that is for the company if you pay them upfront. If I'm selling $100 a month subscription and I can get you to hand over 1200 bucks today, which is the price for the next 12 months. That's an 1100% increase in cash versus if you paid me monthly. Because $1200 is 1100% more than $100 and I'm getting it right now. Multiply that by, let's say 100 customers. And that's the difference between $10,000 today or $120,000 today. And you could say, yeah, but John, you would have gotten that money anyhow over the next 12 months. True, true. But you could build much faster with $120,000 today versus getting that cash in a year. It's that simple. And you can use this model in pretty much any service business. It's not just for software. Photography services, accounting services, home repair services, hairstylists, lawyers. If customers are coming back to you on some repeatable basis, you can use prepay to play. Method number two is what I call cash before creation. And this is basically getting pre orders and deposits on something before it hits the market. It's the Apple playbook. You know how whenever Apple drops a new iPhone, it's not available right away. Instead they take pre orders for a few weeks ahead of time. And what happens? Millions of people, many millions, drop $1,000 for an iPhone that they won't see for a month. That's hundreds of millions of dollars in free cash flow for Apple overnight. Tesla does this too. If we go back to 2019 when they announced the Cybertruck, they take $100 deposit for each preorder, no truck in sight, and they collect over $1 billion by doing this. I'm sure Elon Musk was happy to have that cash. This isn't just a hype creator, but it's operational financing, it's cash flow management. And you can apply this in all kinds of ways. Let's say you're launching a new product, a physical item, or even a new service package. You open it up for presale and give people a reason to buy it early. Maybe it's a discount or an early bird bonus or just limit the supply and say it's first come, first serve. And make sure you do that honestly and ethically. That pre order revenue gives you cash today, plus it gives you a sense of of demand before you build anything. And now you fund production with customer dollars. That's the dream. And by the way, for everyone out there watching or listening or up in my Instagram comments or TikTok saying that they don't have the money to start a business. Listen to this one closely. This is your money. Get customers to pay for the thing before you make it. Every business I've ever built has been customer funded, all of them. And I've done pretty well, I can tell you that. Okay, method number three. This one is probably my favorite. Not because it's better or worse than the others, it's just got the most Psychological warfare packed in, which is fun. I call this one the Loyalty lock in method. And the best example of this is Amazon prime. You pay 139 bucks a year or whatever for prime, and that gets you free shipping on whatever you buy from Amazon. Or at least that's how it started. Over time, Amazon got smart and began to layer in all sorts of bonuses. Now you get to stream shows and movies on prime video. You can stream songs on prime music. There's prime deals, there's games, there's a whole bunch. And it all comes in that one annual fee. But here's the psychological warfare part. Once you've paid for prime, you feel like you have to use it because you've already paid for it. You've got investment bias. Amazon's the first place you'll go to buy something because you know that you're going to save $10 on shipping versus buying it somewhere else. It literally locks in the loyalty. That's why I call it the loyalty lock in method. And lots of places do this. If you've got a membership to a country club or a health club or a timeshare or anything, you tend to go there over and over. Is that because it's the only option? Of course not. But you've prepaid for that thing and now you feel obligated to go back over and over. In the case of prime, members actually spend double versus what non prime members spend buying things on Amazon. So it works. That's psychology, that's retention, that's margin for you. And if you run a business, you can build your own mini version of Prime. I'm going to tell you how. Let's say you're a restaurant. Maybe you offer a VIP card for 99 bucks a year and that gives people 10% off every meal or early access to new menu drops or free desserts once a month. If you're running a retail store, you can offer free delivery or exclusive products or members only discounts. This works really, really well, by the way, in specialty retail. So if you're a store that sells just high end cosmetics or exotic coffee beans from around the world and people are coming back frequently, they probably go for some sort of loyalty lock in. It doesn't have to be complicated either, by the way. Just give customers a good reason to commit and once they do, they're gonna spend more money to justify that fee. I promise you that's cash upfront for you and value for the customer, just like Amazon Prime. All right, so let's get back to Costco. Because the next piece of this story is wild. And it's all about how limiting options can actually drive way more revenue. Quick break. So I can tell you about Influicity. That's the little marketing agency I started in my apartment about 10 years ago. Well, fast forward. It is not so little anymore. Influicity works with some of the biggest brands in the world, building customer communities that drive revenue. We do this through influencers, podcasts, paid media, social media content, AI, and so much more. You can learn more@influicity.com and hey, while you're there, check out our case studies. We have a lot of them. That's influicity.com so some business builders have this weird myth that more is always better. Give the customer every possible choice, stack the menu, tons of variety. And this is total nonsense, because you can see, Costco does the exact opposite. Costco sells fewer items than just about anyone. Listen to this. Walmart has over 100,000 SKUs in their store. Target, it's got about 80,000, and Costco, 3700. You heard me. Costco carries just a few thousand products at any given time. That's across food, electronics, furniture, clothing, appliances, booze, everything. Because when you reduce the number of choices, three powerful things happen. One, you simplify the buying decision. Customers don't stand there comparing labels for 10 minutes. They just pick something and go. Two, it gives you better pricing when you source or make your product, because as a business, you're doing more of one thing that gives you leverage. And three, it makes your business easier to run. Fewer vendors, less complexity. Simple. Now, you might think this strategy only makes sense for businesses that are able to sell fewer products, but it actually works no matter how many products you're selling. And I'll tell you how. Here are three ways to use the less is more strategy in your business. Number one, pick a hero product. No matter how many things you sell, try to pick just one that punches above its weight. Maybe it's the most unique or the most fun or the most absurd or just the most iconic product that you have. Take McDonald's, right? They've got 60 things on their menu at any given time. But if you ask someone to name one thing that they sell at McDonald's, what are they going to say? They're going to say the Big Mac, and that's no accident. Yeah, they sell nuggets, they sell breakfast. They sell salads and wraps and fish and whatever. But the Big Mac is the icon. It gets the billboards, it gets the Airtime. It gets that prime real estate on the menu, even if they never say it out loud. The Big Mac is the hero. So pick your Big Mac and put it front and center. Number two, pre bundle your products. If you sell lots of different products that need to be packaged together, then just create the bundle yourself. You can even give each package a name, a special price, make it dead simple to buy again. When you go to McDonald's, they don't ask you to assemble your meal a la carte. They have combos. So you can just say, gimme. Number three. Double quarter pounder fries, Coke. Boom. Done. You increase the order size and you speed up the purchase. So look at what products you sell that should be combined and just do the work ahead of time. Number three, reduce what you sell. Now, I know a lot of you are hearing this and you're thinking, yeah, but you know, at my company, we sell 700 products and we can't cut down on any of them. And my challenge to you is just try, right? You need to remember that every business could sell a lot of things. They could sell more things. But smart businesses look at the data, and they're ruthless about only selling the items that customers are actually buying. And if you look at your product list, chances are that there are a small handful of items that are doing most of the work. In many businesses, it's like an 80, 20 split. 20% of the products bring in 80% of the revenue. Let's go back to McDonald's. They know this better than anyone. Over the years, they've tried to sell so many things. Remember the Arch Deluxe? I think there was something called the MCDLT. There was McPizza. There was McSpaghetti. They've tried to sell a lot, and today they don't sell any of those things. Not because they were bad, but because they just didn't sell or because they made the business harder to run. So take the hint. You don't have to sell everything. You just have to sell the right things. So strip it back, cut what's not moving, and let your best sellers breathe. Now, let's get back to Costco here, because, you know, the one thing that sticks out at me the most and probably the single biggest takeaway that you'll find in this, this entire business, is just how freaking weird these guys are like everything. Costco doesn't try to be like anyone else. They don't follow retail trends. They don't chase cool. They don't really do E commerce. They don't even label their aisles They've got concrete floors, fluorescent lights, enormous packages. You're walking through a warehouse and yet somehow it feels okay. They give out free samples like it's Halloween. They sell you a 50 pound bag of rice next to a $300,000 watch. You can walk out with paper towels, a kayak and a whole lobster and grab a hot dog while you're at it for the confusing price of $1.50. None of it makes sense. And yet it works because they lean into their brand all the way. And that's the lesson. You've got to lean in to who you are. You got to fully commit. And I mean that as a business builder and just as a person in society. You don't win by blending in. Ever. It's actually a pretty reliable path to mediocrity. You win by being different and owning it. We see it everywhere and we still have a hard time believing it. Look. Look at music. Look at Billie Eilish. Whispered vocals, baggy clothes, these haunting melodies is totally against what pop music is. She doesn't sound like Taylor. She doesn't sound like Ariana, but still, she's one of the biggest pop stars in the world. In movies, we see it with filmmakers like Wes Anderson or Quentin Tarantino. The movies these guys make look nothing like Hollywood blockbusters. But people love them because they're just different. And there are a ton of examples in business. Liquid death, Dr. Squatch, Crocs. You get the idea. So here's the final Costco. Lean into what makes your brand different. Pick your thing and just go all the way. Because when you fully commit, people can decide whether they love you, whether they hate you or whatever. But you know for sure they're gonna be thinking about you. And that's what icons are made of. That's the story of Costco, the $254 billion retail slugger. I love this one. Hope you guys do too. Get my best stuff to your inbox@johndavids.com.