In his superb biography, The Everything Store: Jeff Bezos and the Age of Amazon, Brad Stone discusses in Chapter 4 a breakfast meeting that Bezos once had with Jim Sinegal, founder and then (2001) CEO of Costco. They met at the Starbucks inside the Bellevue (WA) Barnes & Noble.
Sinegal explained the Costco business model to Bezos: it was all about customer loyalty. “Though the selection of products in individual categories is limited, there are copious quantities of everything there – and it is all dirt cheap. Costco buys in bulk and marks up everything at a standard, across-the-the-board 14 percent, even when it could charge more. It doesn’t advertise at all, and earns most of its gross profit from annual membership fees.”
Sinegal observed, “The membership fee is a one-time pain, but it’s reinforced every time customers walk in and see forty-seven-inch televisions that are two hundred dollars less than anyplace else. It reinforces the value of the concept. Customers know they will find really cheap stuff at Costco.
“My approach has always been that value trumps everything. The reason people are prepared to come to our strange places to shop is that we have value. We deliver on that value constantly. There are no annuities in this business.”
The Monday after that meeting, Bezos met with his senior managers and announced that Amazon.com would immediately be cutting prices of books, music, and videos by 20 to 30 percent. Later during a quarterly conference call with analysts, he observed, “There are two kinds of retailers: there are those folks who work to figure how to charge more, and there are companies that work to figure out how to charge less, and we are going to be the second, full-stop.”