Psychology of Buying Series, Part 2: COSTCO

The following transcription was from the Bulletproof Youtube channel. Here is the https://www.youtube.com/watch?v=9n2Ty7LOOc8

Peter Boulden
0:00:00
Okay, thanks for tuning in to the second part of the second case study, I should say, from the Bulletproof Dental Practice Podcast of the psychology of buying, why people spend the way they do, and how biggest companies in our industry or in the world use psychological tricks, tips, and tactics and things that they do on purpose to get people to spend more dough. So why am I talking about this on a dental podcast? Because I think there's always success leaves clues, okay? And if we can take something from an educational process and just business agnostic of what industry it's to, I think we can extrapolate that into dentistry and it can make us better owners, better practice owners, better experience creators, better leaders, all the things. Yeah, so if you're just tuning in and you don't know who I am, my name is Dr. Peter Bolden and I am the co-founder of Bulletproof Dental Practice with my partner, Dr. Craig Spodek. Together, we have 45 years of combined experience with seven locations between us and our mission is to create life-changing impact for entrepreneurial dentists through their Bulletproof pathway, the Bulletproof podcast and Bulletproof summits and Bulletproof masterminds, all the things. Without further ado, I'm going to jump into part, I should keep saying part two, I should say case study two. First one was Ikea, kind of going through all of the things that this gentleman who I follow on Twitter did a long thread on this, on the psychology of buying and the psychological hacks of why people buy. Without further ado, I'll kind of jump into it. So this one is going to be about Costco. So if you're just tuning into this one or finding it, go back and listen to the Ikea one because I think it's pretty interesting. And I think, you know, if nothing else, it was education for me because I wondered, you know, you think that there's no method to the madness when someone's doing this. You think that almost like Ikea must have done this by mistake or didn't think about it. But there's a reason that Ikea was doing some of the things they did, like the maze and the flat packing and the cinnamon bombs. And there's a reason to that. No different. I think we're about to hear, we're about to learn about some of the things that why Costco has been such a successful company. It's $190 billion company right behind Amazon and Walmart. So let's go into the membership. Let's go into an action.

Peter Boulden
0:02:17
Say let's go into membership.

Peter Boulden
0:02:18
Let's go into number one, which is the first thing. I think there's going to be 14 examples of how Costco creates value for their, their customer base. So obviously at the core of Costco, we all know that you have to have flash a Costco card to get in. And, um, and these members pay membership fees based on the level of member they want to be, whether it's an executive member or a gold star member. And so last reporting, the membership fees were 2% of their total revenue. So $4 billion, you see here, $4 billion of the $195 billion. But it accounted for 70% plus of Costco's $5 billion profits. So the membership plans created the profit of that. Also, because people – it's no different than Amazon, which I'm sure we're going to get to study in our case studying, is the membership creates this attraction. No different than Amazon Prime, right? You feel like you're paying for something, therefore you're going to use it. And therefore, when you use it, it means you're going to use that benefit, whether it's Prime and same-day shipping or it's Costco for low wholesale buying. You're going to use that because you had to pay for the privilege of doing so. Therefore, you're creating this accountability and saying, I'm going to use this because I'm going to get my money's worth. Right. But two percent of the revenues, the four billion dollars account for more than 70 percent of Costco's profits on their EBITDA. That is pretty fascinating. So maybe there's maybe there is something in dentistry right to the plans, the recurring revenue model. I know that we've jumped into plans and dentistry because because we want to get more into the subscription model of right. Creating creating recurring revenue for people on a monthly economy, right? Instead of these two trunches of when they come in every twice a year, their cleanings of $300, let's just call it each time, let's break that up into smaller payments on a monthly economy scenario. Same kind of philosophy here. So maybe there is some value to that. All right, so the membership psychology is basically, and it's talking about this here, the CEO, Jim Sinegal, told Jeff Bezos, who then eventually rolled out Prime, that the membership fee is a one-time paying. But the value, I jumped ahead, and I was talking about this earlier, the value is reinforced every time the customer sees a 47-inch TV that's $200 less than anywhere. So they're seeing value in their membership. Even though you have to become a member to shop there, you're seeing value because the prices are far less somewhere in Costco. So in creating potentially memberships in our own office, right, maybe there's some cost saving benefits. If someone's saying like, I agree to pay this on the yearly. If someone's willing to pay $120 at Costco just for the membership, imagine kind of the value that could be assigned to dental cleanings or treatment through a membership plan. So I think membership plans are a good idea. Do we do them in our practice? No, but I see that there's a lot of applicability for doing it. I see why companies like Clear and people who are doing some of their own in-office stuff, it's doing it really successful. All right. So so number three, the membership psychology. So this is the second part of that. So Costco has one hundred and ten million members that are hit by the sunk cost fallacy, which basically means people will spend more time and money on something if they've already made the investment to get their money's worth. And I think I said that earlier. And there's a 90 percent renewal rate. So members are okay with the deal of access to the shopping. No different than Prime and Amazon. Number four, the first thing you see when you enter the Costco's is always that electronics. It's always the TVs, isn't it? And I didn't know this until I thought about that. I'm thinking to myself, all the Costco's that I've been to, it has always been the TVs there. And you're entering a Costco for affordable electronics like laptops, phones, TVs. So Senegal wasn't really kidding. He sees the value, immediately you're creating that value prop of, wow, look at the low cost of these TVs. And I know that I've actually bought at scale TVs and monitors at Costco for that very reason. So I'm like, well, they have really cheap prices. So why the big ticket? So why is this a big thing? Why is this the first thing you see? Because it's a reminder, it's this reminder, first impression that a markdown TVs are markdown, therefore, it looks like you're getting the value from this membership. So immediately you're coming in and seeing the value of these big ticket items, which then you then transcend into thinking, well, if I'm saving this much on TVs, then obviously all this other stuff is probably a discount as well.

Peter Boulden
0:07:19
Pretty fascinating.

Peter Boulden
0:07:21
Okay, number five, this bare bones appearance. So Costco has 800 plus warehouses in the US, and they all have this minimalist interior that screams value, right? There's no decorations on the wall. It is a straight up warehouse with concrete floors, exposed beams, hard industrial lighting. It is not meant to feel warm and fuzzy. And you would think, right, in dentistry, we want to create these environments that make people feel comfortable. But it's a different value proposition here, meaning that people associate low costs and deals with things of warehouses, right? And things filled with bins and looking at all the products because we think that that's where the value, the economies of scale are gonna come in. You know, using cardboard boxes as checkout bags. So this screams value and they do this on purpose is to create this bare bones experience where psychologically they're not sending the message to someone that they're spending all their money and profits on, look how much Costco's making because look how nice the interior of the stores are. It's like nope, we're selling these things almost a penny over cost to you and we're not going to care about the floors and stuff. We're not going to care about the exposed beams. We're not going to care about anything because the goal is to create the lowest price possible and to get more people to sign up for their membership plan. Okay, so number six, boxes stacked to the ceiling. And so in retail there's this concept called stack them high and watch them fly. So you think again, it's a deal when there's tremendous volume of something sitting there, you think that there is a deal associated with that because you think to yourself, they've got to get rid of all this. A lot of these aforementioned do not apply to dentistry, but I think it's just educational nonetheless, right? It's good. It's good even cocktail information. If you're saying, hey, you want to hear something interesting? I learned today on the Bulletproof podcast, learned about how Costco makes their money, learned how Costco's psychological tactics get you to spend more. Number seven, number seven. So the deals, quote unquote, are great. So they aim for this pricing authority, which means they consistently provide the most competitive price across the best products. So it negotiates very hard with the end, with the manufacturers. So it says here, often eating price increases instead of passing it on to customers, right? Because if it goes back to the premise of most of their EBITDA, 70 plus percent of their EBITDA is from the membership. You have to create that value. So sometimes it can eat, it can take a little haircut. And I know they're gonna talk about the rotisserie chicken and if they don't, I will jump in on that because there's a reason they put it at the back of the store, right? Which is no secret, we all know that about supermarkets, why they put milk and eggs in the back because that's what the most consumables that people want. So they make them pass through all the other fancy stuff. Okay, number eight, Kirkland Signature. So Costco has a white label arm that does $40 billion in sales. So it's 25% of all the stuff they sell. And so it's the Kirkland brand and it's synonymous with value. And so that is, we know that because it's a white label brand that they are basically passing on those savings of value to Costco brands. So it's high quality. I know for a fact that all the Kirkland stuff is very high quality. So again, trying to go big, this is in the dentistry, not sure that there's an interpretation for dentistry. You don't want to white label your supplies or your veneers or your crowns. It's not the same psychology, but interesting.

Peter Boulden
0:11:09
All right, number nine.

Peter Boulden
0:11:10
So there's the paradox of choice or no paradox of choice when it comes to Costco. So Costco simplifies the decision-making process with only one or two choices per product. And I think I talked about this a little bit in the Ikea case study about how sometimes, I know dentists who have done this, they overwhelm people with treatment plans of we can do this, we can do this. Even on the front desk of the phone, it's like, well, what day do you want to come in? Versus, let me go back to the example of the treatment plan, versus Mrs. Jones, here are the two options that are best going to serve you. Basically pick one. Or Mrs. Jones at the front desk when you're calling, would you like Wednesday in the morning or Thursday in the afternoon? Something like that, right? People like to quote unquote feel in control, but they like almost to be told kind of what to do. And they don't like too many choices because analysis is paralysis. If you go to a grocery store and you're looking for mayonnaise, you unfortunately have to sit there for a long time looking for, maybe not mayonnaise is not the right example, but let's call it hot sauce. You're looking at all these different hot sauces and thinking like, well, look at, I've never seen this one. And if there's 30 brands, you spend a little more time just evaluating that single point of purchase when you ultimately could be going on to buying more things, going down the way and looking at applesauce or whatever it may be. So Costco simplifies the decision-making process with one or two choices per product. So they only stock about 3,000 SKUs, and SKUs are the barcode, the right individual products, versus a supermarket has about 30,000. So their value comes in being able to hard negotiate and saying, look, you're going to be our Helman's mayonnaise, you're going to be our mayonnaise provider in Costco's. And so that people, you know, Helman says, well, golly, if we're going to be that, we're going to have so much volume created that we're going to give you such amazing prices, which they pass on. So psychologically we think like, because there's only this, there's a few choices in here, there's only a few choices in this Costco. Therefore, they must have negotiated these prices the hardest. Therefore, it must be the best deal. And this picture right here, it says, as promised, here's a giant tuna can and a tub of mayo, like the five-gallon bucket of mayonnaise, which that's always the meme with Costco is, who needs a five-gallon bucket of mayonnaise? I think that's more for Sam's is more geared towards a restaurant tour and Costco is based made for more of the membership of Consumers kind of not different than than Amazon maybe Okay, number 10 Costco increased the size of its shopping carts in the past few years and why not more space? encourages more shopping. I think there's something that applies to that when we look at the size of our plates over the years have increased, which means the size of our caloric intake has increased, which means the size of our midsection has usually increased over the American diet here. But nothing says, nothing says, basically, but the bigger the shopping cart, right, you want to feel like you're getting your money's worth because you're going and nothing signifies that more than a full cart. So psychologically by increasing the car, they're increasing people to spend more because they don't want this anemic cart to take place at checkout, right? I mean, having read, I'm at Costco. I've waited in line. I drove over here. I'm going to fill this sucker up. I get shit I don't even need. All right. Number 11 is store layout. So Costco has this racetrack design. So shelves are on the outside. I know many of you have been in there, probably all, everyone listening has been into Costco at some point in their life. But the shelves are on the outside with low tables. And this allows visibility for the whole store, right? You can see the entire expansiveness of the Costco. Right, like look how big this is. Let me look at this journey I'm about to go through. Look at this adventure I'm gonna go through. And again, like most grocers, the meats and the rotisserie chicken that they lose money on are in the back. So you have to pass this entire store, but you can almost see them when you walk in, right? When you're right when you get in, you can almost see all that stuff, but you have to cross this, you have to cross over the great Sahara of all these crazy products that you didn't know you wanted or needed to get there. All right, rotating goods is number 12. It is not easy to memorize product locations, right? So there's no signage and Costco regularly moves necessities, which it calls triggers, around the store, meaning the triggers are products like the light bulbs and paper towels towels and things that people are hunting for. So what they're doing is creating a treasure hunt for someone because there's no signs. They have to go hunting for it, like hunting and gathering kind of thing, right? Going back to our ancestral days. And because this encourages the movement of people, it looks lively in there, but it also creates this feeling of I found it. I gathered this and I put it in my cart. It's a kind of a dopamine hit, and this feeling of accomplishment in the micro sense. Number 13, all right, so the samples that they give out. So obviously they're saying this is not exclusive to Costco, but no place is better known for the unlimited free samples. Like you can just sit there and keep taking samples. And the psychology is simple. This is something that does apply to dentistry. So if you've stayed in it all the way to now, this is something I talk about all the time in the psychology of, it's actually in our bulletproof manual if you go to the summit. And we've talked about the laws of reciprocity. And so what happens, and so this does apply to dentistry. And I'm getting so excited I'm gonna slow myself down to unpack it a little bit. So what they're saying here is reciprocity. People are compelled to buy a product in return for receiving something for free. So this is the reason that we, as a practice, give out a new patient gift. Used to be candles and yetis or things like, or not yetis and yetis, it was or yetis. And I just didn't feel like that was aligned. But now we give each new patient a Sonic Brush that I had kind of white labeled and built. And it is a little more expensive from a new patient acquisition, but it is a nice gift and it creates that value right on the front end. In addition for creating that value, like meaning this is gonna be a different dental experience. Here is your Sonic Brush that you would have had to have paid $100 for somewhere else, right at the open market. But here's the value you're gonna get. And then it also creates this reciprocity. So people feel compelled to return the favor. And how do they do that? It's by either telling their friends about their experience or by enrolling in treatment or staying retentive to the practice. These are the things that, yes, I want them to have an awesome toothbrush that we designed, but at the end of the day, it's really about the economics of the business. Number 14 is long checkout lines. So Costco has introduced self-checkout, but because shoppers don't wanna wait long lines for a single jug of milk, right? Everyone knows there's lines of Costco, like there's a picture here, if you're listening to this on the podcast, there's a picture here of people just shopping carts lined up all the way down. But they'll make you they'll make you they have an express line for you know the single items the milk the eggs the small items but they're going to make you wait again for this going through with the giant carts again to introduce the psychological effect of like value. I know it's crazy to think of value in waiting, but value in accomplishing something. I got through this door, I've gotten through this line, look at this, what I'm getting. It assumes value with the journey that you're doing. And you're not doing this every day, right? You're doing this maybe once a month or once every couple weeks, you're going to quote unquote a Costco trip. All right, this is where it gets interesting to me, I think, because you hear about this on the Internet and is the cheap food, the Costco, the $1.50 hot dog at checkout. It's like the $5 rotisserie chickens in the back. These are lost leaders for Costco, meaning lost leader means they are losing money with every hot dog they sell. They are losing money with every rotisserie chicken they sell. They are probably losing some money. And the price has been unchanged since 1985. And so what this does, it's seared the value into people's brain as they leave, right? Like, oh my gosh. So in the beginning, we had the value of the TVs. In the end, we had the value of cheapness. Cheap, cheap meaning like, the value of saying like, oh my gosh, a hot dog is $1.50? I mean, it's four times more expensive at the ballpark, or maybe it's $8 at the ballpark, $1.50 and it's a big hot dog. And so the Costco's founder once told the company's CEO, if you raise the price of the effing hot dog, I will kill you. It's led to be one of the greatest business headlines in history. So you're leaving on a high, basically saying like a reward of food, which as we know, food is a reward for a lot of us. We look forward to our next meal. And then especially if we're getting at this massive value, like a giant hot dog for $1.50, or a piece of pizza for $1.50, you know, and these giant Pepsi sodas and things. That's why they're always busy at the end of the Costco, because people feel like they, quote unquote, accomplished this journey, right? All of a sudden they're hungry now, because they did something on a Saturday morning. And that is it. I think it's a good thing to end on. Obviously you can't put that into dental terms, but the cheap food on exit, you can't put in the dental firm. Maybe you wanna give people a, I'm kidding, I'm kidding, I got nothing there, no jokes. Anyway, we will continue on with, this was the second case study on Costco. We will continue on, keep going into companies. And again, I'll continue to try and add extrapolation into dentistry. See how I keep using that word, into dentistry. And there may be some correlation, there may not be, but I think ultimately it helps raise our business acumen and just the way you start thinking about things differently in our own practices, our own businesses, or become better consumers or understand why things are done the way they are. It's for a reason. It wasn't by accident, which some of the things I always thought about, like, why wouldn't they raise the price of the hot dog? That's crazy. They could sell them for four times as much. It's a reason for that. It's a reason for that. So anyway, hope you're enjoying this and we'll see you guys on the next part.

Transcribed with Cockatoo