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The Untapped Pricing Power of Costco | Guru Focus

Many (web) pages have been filled about the concept of untapped pricing power but companies that have it are like unicorns. Everyone knows what they look like, and some people claim they once saw one. But there seems to be no opportunity to observe one at your leisure.

This has bothered me for some time and this week, I decided to fire up my keyboard and do something about it. Being lazy, I don’t want to be hunting unicorns on a daily basis, so I might as well point one out that is likely to stick around for a decade or two.

  • Warning! GuruFocus has detected 7 Warning Sign with COST. Click here to check it out.
  • COST 15-Year Financial Data
  • The intrinsic value of COST
  • Peter Lynch Chart of COST

Measuring retail cost

Retail is about acquiring goods from suppliers in large volumes and providing those goods to a large group of consumers in much smaller volumes. The supplier benefits because it can adjust its operation to the agreed-upon volumes, and consumers benefit because they can get what they want, where they want it and in the volume they need. The retailer covers its costs by charging the consumer a higher per-unit price than what it paid the supplier. That’s the gross margin, also known as markup.

It follows that the retailer that is able to get goods from the supplier to the consumer at the lowest cost has superior earnings power. To find that company, we divide the costs of some competing retailers by their revenue. We do that by subtracting net margin from gross margin and dividing the result by revenue.

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The Untapped Pricing Power of Costco.

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