Motley Fool - Thu Jul 11, 4:00PM CDT
Image source: Upsplash/The Motley Fool
Costco recently made headlines by announcing the first increase to its membership fees since 2017. The standard Gold Star membership is rising by $5 to $65 per year, while the higher-tier Executive membership will now cost $130 per year, $10 more than it previously did. The changes will go into effect Sept. 1.
In addition to the price increase, Costco mentioned something else interesting about its membership program. Of the 52 million Costco members in the U.S. and Canada that will be impacted by this price increase, more than half have Executive memberships.
Why do so many people pay twice as much for their membership?
A Costco Executive membership costs exactly twice as much as the base membership tier, which gives members full access to shop in the retailer's warehouse club locations. This begs the question of why more than 26 million people are willing to pay a significantly higher annual membership fee.
Executive members get several perks that aren't available at the base tier, but the most important one (by far) is 2% back on most Costco purchases in the form of an annual reward certificate. In other words, for every $1,000 you spend on qualifying Costco purchases during your membership year, you'll get $20 back to use at Costco. And it's worth noting that this 2% is in addition to any credit card rewards you get for your spending.
Not all purchases qualify. Common examples of excluded purchases include gas, tobacco, gift cards, and food court purchases. Alcohol and prescriptions also don't count in certain states.
To be sure, Executive membership has other perks. Executive members generally get additional benefits like resort credits when they book vacations through Costco Travel. And there are often extra perks and discounts for things like automotive services and insurance purchased through Costco. But for most people, the 2% reward is the big motivating factor for getting the higher tier membership.
Is a Costco Executive membership worth the cost for you?
Let's do some math (don't worry, not too much). The difference in the cost of a Costco membership and an Executive membership is $65. So, in order for upgrading to be worthwhile, the rewards you earn throughout your membership year would need to be worth more than this difference.
Dividing $65 by 2%, we can see that the amount of Costco spending needed to earn a $65 annual reward is $3,250. This is the amount you would need to spend to break even on an Executive membership's cost. If you spend more, the Executive membership could be an easy decision.
To put this in perspective, $3,250 in annual spending equals about $271 per month at Costco on qualified purchases. The average family with kids spends $331 per week on groceries alone, according to the Census Bureau, so reaching this monthly spending threshold isn't too difficult for many members, even if you only do some of your grocery shopping at Costco.
As a personal example, my wife and I spend about $600 at Costco in an average month. We buy whatever groceries make sense to buy in bulk (I have a family of four), and occasionally buy other items like clothing, batteries, or even furniture. This translates to about $7,200 in spending per year, and 2% of this gives me a reward certificate of about $144 each year. Last year, our Costco reward certificate was for a little over $150.
The bottom line
While it might seem surprising at first that over half of Costco's membership base chooses the plan that costs twice as much, it certainly makes sense when we crunch the numbers. With a strong rewards program and a manageable spending threshold to make the Executive membership worth the higher price, it's not hard to see how paying the additional membership cost makes sense for tens of millions of people.
Top credit card to use at Costco (and everywhere else!)
If you’re shopping with a debit card, you could be missing out on hundreds or even thousands of dollars each year. These versatile credit cards offer huge rewards everywhere, including Costco, and are rated the best cards of 2024 by our experts because they offer hefty sign-up bonuses and outstanding cash rewards. Plus, you’ll save on credit card interest because all of these recommendations include a competitive 0% interest period.
Click here to read our expert recommendations for free!
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
