How Costco Is Like an Airline

If you pay $130 for your Costco Executive Membership rather than the $65 base fee, you have several new privileges.

It sounds a bit like the airlines.

Extra Fees

After a soft launch during June, Costco formally initiated early entry for their posh tier. Higher paying members can enter stores an hour before everyone else on weekdays and Sundays, and 30 minutes earlier on Saturdays. With fewer people, lines will be shorter. In addition, for annual purchases less than $1,250, Executive Members receive a 2 percent rebate. As the source of 73 percent of the company’s sales, those bigger spenders have a happier shopping experience.

Somewhat similarly, most airlines divide spending opportunities through their fees. They enable their most frugal cohort to buy just a seat–nothing else. Meanwhile, through a slew of fees ranging from extra legroom, to boarding early, to more suitcases, and snacks, they elevate their revenue.

Our Bottom Line: Marginal Analysis

Defined as the place where we get something extra, economists say we frequently think at the margin. Ranging from extra sleep to extra chips, we are constantly assessing whether more is worth it.

As economists, the wisdom of thinking at the margin takes us back to Alfred Marshall. Remembered as one the first marginalists, Alfred Marshall was born near London in 1842. He was reputedly influenced by an excessively rigid father who required hours of study each night. Sounding rather eccentric, Marshall said that he needed to rest from his work every 15 minutes or so to be sure he was refreshed. During “rest” breaks, he read Shakespeare and Greek plays. As a chair of Political Economy at Cambridge for 23 years, his contributions to the study of economics were massive through his classes, his books, and the eminent economists he taught.

Among his many insights, Marshall told us that margins make a difference. Think of the law of demand. Step by step, as price marches upward, your incentive to spend goes down. But it slides downward by increments. Similarly, he constructed a supply curve through the marginal costs of production. His conclusion, considered revolutionary, was that value comes from both demand and supply. And it all took him back to the margin.

As does Costco with its premier perks.

My sources and more: Together, Business Insider and Yahoo Finance had the Costco details. Then, for airline fees, I checked Nerdwallet. Please note that several of today’s paragraphs were from a past econlife post.