INDIVIDUAL ASSIGNMENT

TECHNOLOGY PARK MALAYSIA

BM009-3-2-DCV

DELIVERING CUSTOMER VALUE

APD2F2106 [IBM/HRM/MKT(DM)/MKT/BM/BM(E-BUS)] /
APU2F2106 [BM(E-BUS)/HRM/IBM/BM/MKT/MKT(DM)]

NAME: NG YIK HONG

HAND OUT DATE: 16 FEBRUARY 2022

HAND IN DATE: 2 FEBRUARY 2021

Lecturer’s Name: CHRISTOPHER PHILIP JOHN

WEIGHTAGE: 60%

Word Count : 2983

INSTRUCTIONS TO CANDIDATES:

1 Submit your assignment at the administrative counter.

2 Students are advised to underpin their answers with the use of references (cited using
the Harvard Name System of Referencing).

3 Late submission will be awarded zero (0) unless Extenuating Circumstances (EC) are
upheld.

4 Cases of plagiarism will be penalized.

5 The assignment should be bound in an appropriate style (comb bound or stapled).

6 Where the assignment should be submitted in both hardcopy and softcopy, the softcopy
of the written assignment and source code (where appropriate) should be on a CD in an
envelope / CD cover and attached to the hardcopy.

7 You must obtain 50% overall to pass this module.

Executive summary
In this report, we discuss how Costco is using customer relationship management strategies in
the retail industry to strengthen its customer relationships. The first part of this report is about
Costco's goals and scope. In addition, the first part also describes the background of Costco,
the target market of Costco's segmented customers, and Wal-Mart's market position in the
market. The second part that follows describes what the value proposition is and the value
principles Costco applies to provide better value to their customers. In Part 3 of this report is
about Costco's four-tier customer pyramid, the process of converting potential customers into
profitable loyalists, and how well it works to prioritize customer satisfaction and loyalty. In
addition, the report describes Costco's use of CRM tools to help improve customer
relationships and profitability, and which technologies Costco applies to build better value
with customers. Finally, at the end of this report, I write about the three defects of Costco and
provide opinions and solutions for each defect.
Table of Contents
1.0 Introduction........................................................................................................................1

1.1 Objectives & Scopes.......................................................................................................1

1.2 Background of Costco Wholesale..................................................................................1

1.3 Company Analysis..........................................................................................................2

2. Three core type of value......................................................................................................3

2.1 Three Value Disciplines.................................................................................................3

2.2 Costco Value Disciplines................................................................................................4

3. Four tier customer pyramid................................................................................................6

3.1 Processes of Costco convert potential customers to profitable loyal advocates........6

3.2 Costco prioritising on customer satisfaction and loyalty............................................7

3.3 The extent of Costco benefited from the application of CRM Tools.........................9

3.4 Costco uses technology to build better value...............................................................9

4. Conclusion and Recommendation....................................................................................10

References...............................................................................................................................12
1.0 Introduction
1.1 Objectives & Scopes
The purpose of this research is to look into how Costco employs customer relationship
management tactics to provide better value to customers, build strong and lasting customer
relationships, implement its relationship marketing strategy, and eventually grow its customer
loyalty base. This report's research focuses on numerous aspects of Costco's customer
relationship management, including customer pyramids and value proposition. Costco will be
able to deliver a better value as a result of these factors.

1.2 Background of Costco Wholesale

Costco's first location opened in 1976 as the Price Club in a converted hangar on Morena
Avenue in San Diego. Initially serving only small businesses, the company later found it
could gain greater buying clout by serving a select audience of non-business members. With
this change, the development of the warehouse club industry began to flourish. The first
Costco warehouse opened in Seattle in 1983. Costco became the first company to grow from
zero to $3 billion in sales in less than six years. Costco Wholesale is a multi-billion-dollar
global retailer with warehouse club operations in eight countries. Costco is a recognized
leader in its field, is also committed to quality in all areas of its business and is respected for
excellent business ethics. Despite Costco's size and explosive international expansion, Costco
continues to foster a family atmosphere in which employees thrive and succeed. Beside that,
Costco is a membership warehouse club with a mission to provide our members with the best
possible discounts on name-brand products. Costco offers a diverse assortment of items, as
well as the convenience of specialist departments and exclusive member services, all geared
to make your shopping experience more enjoyable. (Costco Wholesale Corporation, 2022)

1
1.3 Company Analysis
Costco uses demographic segmentation to interact with their customers. Costco's
demographic breakdown is very broad because their current offering includes all genders,
races and incomes. For age groups and social classes, they are all for those over 30 and have
their own family. In addition, Costco’s warehouse’s original goal was to focus on market
positioning for small and medium-sized businesses for affordable resale purposes. They are
also targeting mid- to high-end consumers with their private label product "Kirkland
Signature". Every Costco warehouse offers the highest quality and most exclusive products at
the lowest prices and offers the largest one-stop shopping product category on the market
(Marques Thomas, 2021).

2
2. Three core type of value
2.1 Three Value Disciplines
The value disciplines are a concept coined by Michael Treacy and Fred Wiersema in their
book "The Discipline of a Market Leader" to define the various ways in which a company
can differentiate itself from its competitors inside the CRM. Next, the three value disciplines
of customer Intimacy, product leadership, and operational excellence are now important
competitive strategies for enterprises. In addition, Michael Treacy and Fred Wiersema say
that if an organization wants to be a market leader, it must excel in one of these areas (Praxie,
2022).

The first type of value disciplines is Customer Intimacy. Customer intimacy refers to a
company's focus on providing a one-of-a-kind level of customer care that enables for product
modification and customization to match the needs of various clients. Next, the company also
combines extensive client knowledge with operational flexibility, allowing it to respond
promptly to practically any need, from product customization to specific requirements.
Furthermore, in pursuit of customer intimacy strategies, companies continue to tailor and
mould products and services to match increasingly sophisticated client definitions, resulting
in high levels of customer loyalty. (MBA Knowledge Base, 2022).

The second value disciplines are Product Leadership. Product Leadership refers to a
business building a culture of continually bringing quality products to market. They work
hard to create a constant stream of innovations that meet the needs of loyal and new buyers.
This means that the company is constantly innovating and creating the latest products to gain
market leadership and constantly raise the bar of its competitors. Additionally, the company
invests extensively in R&D to continually enhance their products, including their own, in
order to preserve their market share and competitive edge (TOOLSHERO, 2022).

Lastly, in value disciplines, Operational Excellence means that organisations provide quality
products or services to their consumers at the lowest total cost, with the least amount of
inconvenience, and always on time. Furthermore, firms that focus on cost leadership will

3
always strive to give high-quality products or services to their clients at competitive costs and
in an easy-to-purchase manner. They also focus on providing clients with competitively
priced items or services with minimal inconvenience. For example, a well-run company plans
its whole business model ahead of time for its intended client base, with a special focus on
speed, efficiency, and cost. This is because they focus on streamlining the process. That
means they simplify operations and minimize business overhead (MBA Knowledge Base,
2022).

2.2 Costco Value Disciplines

In the value discipline, Costco regards operational excellence as its value criterion. Costco's
operational excellence is effectively managing inventory and distribution, minimizing
merchandise handling and bulk purchasing to lower product prices. Cost leadership means it
is cheaper to source products and provide services, so Costco takes their ability to take deep
discounts from manufacturers and offer leading national brands at low prices to attract new
customers. Then, the money they save from the product can be reused to further reduce the
price (YUCHUANZHAO, 2016). The high sales and quick inventory turns that Costco
generates help reduce inventory handling costs and increase cash flow. For example, the
quick realization of cash helped them pay off suppliers and receive additional discounts for
early settlement (COLOSSUS, 2021). In addition to this, reducing diversity is one of Costco's
operational excellence strategies. Costco limits the amount of products sold in stores to 3,300
permanent references and 500 rotating references, for a total of 3,800 products, as stated in
their plan. Large classic sales areas like Carrefour or Walmart, where they offer up to
150,000 items, will allow Costco to further simplify supply chain logistics. In addition to the
concentrated product assortment, Costco also offers its own private label, Kirkland Signature.
The brand accounts for 25% of its global sales and provides higher profitability at low rates.
Costco, on the other hand, applies added value in operational excellence. By providing fewer
references, Costco can leave products on pallets on the same surfaces as other stores. Pallet
trucks are utilised to place pallets with dozens or hundreds of products, so the Costco
warehouse saves on racking costs. There's no longer any need to manually fill in rays. They
accomplish this by collaborating with upstream suppliers to have the pallets used as displays.
This will save their customers a lot as bulk buying is much cheaper per unit and will result in
larger basket sizes. And it has the added benefit that items are harder to shoplift, which

4
reduces shrinkage, which all saves them money, whether it's working capital or capital
investment ( EPONINE PAUCHARD, 2021).

In addition, customer intimacy is one of Costco's strategies. Customer intimacy means that
companies are familiar with customer data, they know what customers want or need. A good
relationship is like a bridge between supermarkets and customers. The stronger and wider the
bridge, the more traffic will be generated through it. In other words, a good relationship with
customers will boost sales tremendously. For example, when customers are satisfied with the
service, they will happily come here to buy something next time. On the other hand, there is a
lot of useful feedback in the conversation between the customer and the sales that will help in
optimizing the service and spotting problems in the system (YUCHUANZHAO, 2016).

5
3. Four tier customer pyramid
The 4-tier customer pyramid is meant to be used to segment and analyze customers in a
customer portfolio. Businesses use a 4-level customer pyramid and divide customers into 4
different levels based on their sales, such as Platinum, Gold, Iron and Lead. As a result,
understanding your various customer tiers allows you to better allocate your resources in
order to boost earnings. The 4-tier Customer Pyramid can also assist you in determining
which customer type is best for your Platinum level (Data Axle Genie, 2022).

3.1 Processes of Costco convert potential customers to profitable loyal

advocates
A 4-tier customer pyramid is used in many retail industries, but not all retail industries use
the same 4-tier customer pyramid. There are 4 levels in the 4-level customer pyramid
including lead, iron, gold and platinum. Costco's four membership tiers include Gold Star
Executive, Gold Star Everyday Value, Business Executive and Business Everyday Value. In
the 4-tier customer pyramid, Costco also assigns their membership levels to it. For example,
the last two lower tier membership cards are Gold Star Everyday Value and Business
Everyday Value membership card, while the two highest membership cards will be Gold Star
Executive and Business Executive membership card. Each of these 4 cards has its own
advantages. They all help Costco compete where the competition for groceries in the U.S. is
fierce. These four cards give Costco a powerful advantage, which is customer loyalty to the
store. Costco can sell things at significant discounts that barely pay the cost by selling
memberships. Furthermore, membership revenue continues to rise and accounts for a sizable
amount of Costco's profits. For example, in the 2020 fiscal year report, this membership fee
revenue was nearly $3.54 billion. Costco can keep prices low and attract and retain more
customers because of the consistent supply of membership fees. As a result, practically all of
Costco's multibillion-dollar membership fee revenue is profit (VANESSA PAGE, 2021).

The difference between Costco and Walmart is that their membership plan does not need to
charge members $98 for service benefits. Costco members only need to pay the membership
fee every year. The fees are $60 and $120, respectively, because Costco has two tiers of
membership, a basic and executive plan for consumers and a basic and executive plan for

6
businesses (Kenny Quek, 2021). When you have a Costco membership, you will be able to
get in-store and online perks, such as ostco cardholders being able to fill up at Costco gas
stations at the cheapest prices, and also at Costco Hearing Centers, Costco Optical Shop with
Costco Pharmacy. Plus, Costco members can conveniently shop from home or visit one of
their many locations. These stores sell food, confectionary, appliances, tyres, toys, hardware,
sporting goods, jewellery, watches, cameras, books, apparel, and furniture, among other
things. Costco also provides a "100% Guarantee" for members and items. Cotsco will provide
a complete refund if you are dissatisfied with your subscription at any point. Purchase
refunds are the same, however there are some limitations (Elissa Sanci, 2020). However,
potential customers cannot enjoy these benefits because they are Costco prospects who are
not yet registered members. So in order to attract these potential customers, Costco uses a
few strategies. For example, customers without a membership are unable to enjoy Costco's
inexpensive hot dogs, pizza, and irresistible frozen yoghurt in the food court. Additionally,
Costco sells a whole roast chicken for $4.99, but those are members-only prices (Catherine
Clifford, 2019).

3.2 Costco prioritising on customer satisfaction and loyalty

In order to give customers a good satisfaction and maintain their loyalty to Costco, each stage
of Cotsco's customer pyramid has different benefits and benefits. For example, the most
expensive membership card for Costco's Gold Star is the Gold Star Executive. In comparison
to Costco's basic individual membership Gold Star Everyday Value, Gold Star Executive
offers a wide range of special membership advantages for $120 per year. Costco Gold Star
Executive members can take advantage of perks such as a 2% annual bonus on qualifying
purchases (up to $1,000), additional benefits and discounts on Costco services, a free
subscription to Costco Connection, and discounts at all Costco locations worldwide and on
Costco.com Online, among others. Additionally, Costco's Gold Star's basic membership card
is Gold Star Everyday Value. Gold Star Everyday Value is Costco's most basic individual
membership option, with less advantages than Gold Star Executive. However, the yearly
membership fee is $60, and Gold Star Everyday Value can assist you in taking advantage of
Costco's low prices both online and in-store. (Samantha Ellsworth , 2022).

7
In addition, Costco has two other membership levels that are Business Executive and
Business Everyday Value. Most of these two membership cards are used in businesses. One
of the special benefits of these two membership cards is the purchase of resale. For example,
if you're buying something for commercial, personal, and resale use, Costco will provide the
manufacturer with some information to process retail rewards for their business members.
Other than that, the only difference in benefits between Business Executive and Business
Everyday Value is that Business Everyday Value does not include some of the Business
Executive benefits, such as the annual 2% bonus on qualifying purchases (up to $1,000) and
additional benefits and discounts on Costco services(Samantha Ellsworth , 2022).

8
3.3 The extent of Costco benefited from the application of CRM Tools
Customer relationship management (CRM) refers to all aspects of an organization's
interactions with customers that contribute to competitive advantage, customer loyalty,
consumer behaviour, and, ultimately, profitability. Therefore, the retail industry needs to use
CRM to seek to build customer relationships and improve business profitability. Costco
determined in 2012 that a manual communication and information warehousing system was
not the best approach to handle corporate data connected to consumer behaviour. As a result,
they focused their attention on CRM service providers and ultimately purchased the CRM
service from FreeCRM.com. Costco chose FreeCRM to track partnerships and affiliate
programs in its business-to-business wholesale division to manage its customer experience.
Special purchasing schemes, vouchers, and discounts are just a few examples of what might
be offered to participating groups. Costco can get close to customers and uncover consumer
behaviour via CRM, which is critical for market success. It improves Costco's customer
interactions, integrates product and supply chain management with consumer requirements,
and allows the organisation to make strategic financial plans based on more accurate and
timely data (CISION, 2012).

3.4 Costco uses technology to build better value

Costco is introducing artificial intelligence and machine learning to the bakery to improve
value. Costco used a less-technical technique to forecasting demand in their bakery before
implementing machine learning. For example, bakery managers make manual adjustments
each day to account for products left over from the day before, as well as lost and damaged
things. Costco calls this solution the "Future State Bakery Experience," this is a tablet
software that presents data and insights to bakery managers and digitises tedious procedures.
For each bakery menu item, the software employs machine learning to generate planning
forecasts. it also anticipates the bake time for each item and compensates for carryover and
broken goods automatically. As a result, Costco's bakeries will not have to consume rotting
bread as a result of overproduction. At the end, such technology would bring Costco's bakery
into a future state when new customers arrive, and automatically generate and update plans to
put the bakery in that state (Niccolo Mejia, 2020).

9
4. Conclusion and Recommendation
In this conclusion, Costco applies a variety of relationship marketing strategies to build
relationships with customers. Additionally, Costco's value proposition focuses on operational
excellence and customer intimacy, and engaging with customers to provide the lowest cost
products and services to customers in the retail industry. In addition, Costco applies the
customer pyramid strategy and divides their members into 4 types, such as Gold Star
Executive, Gold Star Everyday Value, Business Executive and Business Everyday Value.
Each type of member has different benefits, which will satisfy Customer demand. Next,
Costco used FreeCRM to track partnerships and affiliate programs in its B2B wholesale
division to manage its customer experience. Finally, Costco adopted modern technology
artificial intelligence and machine learning to their bakery shop.

During this assignment, I found three Costco flaws. The first flaw is consumer preference.
Costco buys certain things in quantity and attempts to sell them as rapidly as possible because
it uses the warehouse method, but the method only works if it can maintain these high
numbers. Costco might be left with a lot of unsold, perhaps perishable items if consumer
preferences change. In order not to let more merchandise rot, I suggest Costco can use AI
technology to manage their warehouse. The purpose of this intelligence is that when the
inventory reaches a certain amount, it will inform the staff that it will not continue the
inventory. This way, Costco won't waste that capital, and it will still be able to provide
customers with fresh ingredients.

The second flaw is that because Costco's merchandise is bought in bulk and in bulk, some
families are unable to ship their purchases home, resulting in limited purchases. To solve this,
Costco should set up a free shipping service, but this is only available to members. When
you've bought too many items, you can go to the counter and fill in your address and have a
Costco staff member ship it home for you. When Costco has this service, their customers can
buy with confidence without being restricted.

10
The final flaw is Costco's slow adoption of e-commerce. In the current digital age, many
retail industries are starting to move into e-commerce just to appeal to those millennials. In
the second quarter of 2020, e-commerce penetration in the retail industry exceeded 20%,
while Costco was only around 7% (Robert Ferris, 2021). So in order to keep up with the pace
faster, Costco head office can hire some people who specialize in e-commerce to strengthen
their online business. With these, Costco's millennial customer base will increase, and
millennials will also advertise Costco, such as sharing the great value items they buy at
Costco.

11
References
Catherine Clifford. (2019). How Costco uses $5 rotisserie chickens and free samples to turn
customers into fanatics. Retrieved from CNBC:
https://www.cnbc.com/2019/05/22/hooked-how-costco-turns-customers-into-
fanatics.html

CISION. ( 2012). Costco Wholesale utilizes CRM from FreeCRM.com for Superior Value.
Retrieved from CISION:
http://www.prweb.com/releases/2012/11/prweb10121579.htm

COLOSSUS. (2021). Zack Fuss, Chris Bloomstran - Costco: Relentless Focus on the
OneThing. Retrieved from COLOSSUS:
https://www.joincolossus.com/episodes/61922194/bloomstran-relentless-focus-on-
the-one-thing?tab=transcript

Costco Wholesale Corporation. (2022). Costco Jobs. Retrieved from Costco Wholesale
Corporation: https://www.costco.com/about.html

Data Axle Genie. (2022). What is the Customer Pyramid Model? Retrieved from
dataaxlegenie: https://www.dataaxlegenie.com/blog/what-is-the-customer-pyramid-
model/

Elissa Sanci. (2020). Is a Costco Membership Actually Worth It? Retrieved from Wirecutter:
https://www.nytimes.com/wirecutter/money/costco-membership/#so-is-the-price-of-a-
costco-membership-worth-it

EPONINE PAUCHARD. (2021). COSTCO: OPERATIONAL EXCELLENCE IN

DISTRIBUTION. Retrieved from Coresilium:
https://www.coresilium.com/en/2017/03/costco-operational-excellence-in-
distribution-example/

Kenny Quek. (2021). Costco’s business model: How Costco makes money. Retrieved from
The Fifth Person: https://fifthperson.com/costco-business-model/

Marques Thomas. (2021). Costco Target Market & Demographics (All You Need To Know).
Retrieved from QuerySprout: https://querysprout.com/costco-target-market-
demographics/#:~:text=Costco's%20target%20market%20is%20middle,and%20have
%20their%20own%20families.
12
MBA Knowledge Base. (2022). Three Value Disciplines by Treacy and Wiersema. Retrieved
from MBA Knowledge Base: https://www.mbaknol.com/strategic-management/three-
value-disciplines/

Niccolo Mejia. (2020). Machine Learning in Big Box Retail – Walmart, Target, and Costco.
Retrieved from Emerj: https://emerj.com/ai-sector-overviews/machine-learning-big-
box-retail/

Praxie. (2022). Value Disciplines Model. Retrieved from Praxie: https://praxie.com/value-

disciplines-model-online-tools-templates/

Renee Ann Butler. (2021). 4 Problems With Costco's Business Model. Retrieved from
Investopedia: https://www.investopedia.com/articles/markets/011216/4-problems-
costcos-business-model-cost.asp

Robert Ferris. (2021). How Costco makes billions by charging people to shop there.
Retrieved from CNBC: https://www.cnbc.com/2020/09/15/how-costco-makes-
billions-by-charging-people-to-shop-there.html

Samantha Ellsworth . (2022). Costco Membership: Here’s Everything You Need to Know.
Retrieved from Shopfood.com: https://www.shopfood.com/grocery-stores/costco-
membership/

TOOLSHERO. (2022). Value Disciplines. Retrieved from TOOLSHERO:

https://www.toolshero.com/strategy/value-disciplines-treacy-wiersema/

VANESSA PAGE. (2021). 3 Reasons Costco Has Membership Fees. Retrieved from
Investopedia: https://www.investopedia.com/articles/investing/071015/3-reasons-
costco-has-membership-fees.asp

YUCHUANZHAO. (2016). What make Costco success? Retrieved from wordpress:

https://mpk732t22016clusterb.wordpress.com/2016/07/25/what-make-costco-success/

13