Why are gas prices so much cheaper at Costco and Sam’s Club gas stations than at other gas stations? The answer to this question has to do with the businesses’ business models, which are quite different.
This article will provide you with insight into why Costco and Sam’s Club offer such low gas prices and how they’re able to do it. To learn more about the differences between these two big-box stores’ business models, continue reading this article and discover how they keep their gas prices low while still maintaining profitability.
Reasons Why Is The Gas Price Significantly Cheaper At Costco and Sam’s Club Gas Stations?
Here are some reasons why gas prices are significantly cheaper at Costco and Sam’s Club gas stations.
Membership Cost
At Costco and other warehouse clubs, members pay $55 a year for access to cheap gas. Nonmembers at Costco pay $0.30 per gallon more than members; nonmembers at Sam’s will be paying 20 cents more per gallon than members.
If you’re not already a member of one of these clubs, it can make sense to look into becoming one if they have a location nearby — particularly if you go through several gallons of gas each month. Even with membership fees, you may still come out ahead by comparison shopping.
As an example, let’s say your current average price is $3.50 per gallon. You spend about 500 gallons on gas annually. Your annual cost would be $1,500 if you are a non-member. If you are a member at Costco, then your annual cost would only be $550. That is almost half off!
Plus there are many additional benefits that come along with being a member such as discounts on products in their stores and online. And who doesn’t love saving money? There is no reason why everyone shouldn’t try and save where they can. It just makes good financial sense!
The convenience of Comparing Items
In addition to its larger size, it’s easier to compare gas prices between Costco and Sam’s Club. At Costco, for example, you can drive through one station without hitting a pothole or getting stuck in traffic.
When it comes time to fuel up, every pump at that station has exactly what you need – no more guesswork about which gas pumps will accept your card. This convenience saves time as well as money! The Out of Sight Factor: People tend to spend less when they don’t have their wallets out on display.
For example, did you know that most restaurants charge more when customers are seated in full view of other diners? The same principle applies to gas stations. With fewer cars lining up to pay for fuel, Costco and Sam’s Club make it easy to take advantage of lower prices without feeling like everyone is watching how much you spend on gasoline.
The Costco Effect
When Costco opened its first gas station in Southern California, gas stations in Orange County dropped their prices. When Costco opened another station, more stations followed suit to match it.
While no one knows for sure why Costco’s gas is so cheap, most experts agree that it has something to do with competition: when a new competitor enters a market, others need to lower their prices or risk losing customers.
This phenomenon is known as the Costco effect, and it’s been shown to happen not only at gas stations but also at grocery stores. The lesson here? If you want to get good deals on gas, shop around—but if you want to be sure you get a good deal every time, buy your fuel from Costco!
Advertising Power
Costco’s ability to pass on savings to its members is due, in part, to its advertising clout. Its size has allowed it to negotiate rock-bottom prices with its suppliers—something most retailers simply can’t do because they lack sufficient purchasing power.
By choosing which brands it will sell (and how many of them), Costco can significantly reduce inventory costs and free up more money for advertising. Costco spends just 1 percent of sales on ads compared with an industry average of 5 percent.
This allows it to spend about $2 billion a year on advertising, while other big box stores like Target spend less than half that amount. And because Costco doesn’t have a wide range of products or a diverse customer base like Target does, those dollars go even further when targeted at specific consumers.
As a result, Costco reaches far more people than Target does at a fraction of the cost. This is why the gas price is significantly cheaper at Costco and Sam’s club gas stations which translates into higher profits and lower gas prices for customers.
Capitalizing on Consumer Inertia
Costco isn’t any cheaper than other gas stations; its prices are set to be about 15 percent higher. Instead, it capitalizes on consumer inertia to keep people from noticing that their gas is more expensive elsewhere.
By building long lines at its pumps, Costco discourages consumers from taking a second look at what other stations are charging—even though they might save money by doing so.
Costco also keeps prices low by giving customers as little choice as possible: there are no fancy brands or specialty products to distract you, and only one type of fuel (unleaded) for each pump. This allows Costco to sell gas cheaply without having to worry about customer service or marketing costs.
Costco doesn’t even have signs advertising its gas prices outside of its stores—it relies solely on word of mouth for business. The lack of choice and price transparency makes it easier for customers to accept whatever price Costco sets.
The company has a reputation for excellent customer service, which means shoppers don’t mind paying extra when they know they can trust Costco to take care of them if anything goes wrong.
While you may pay slightly more per gallon than you would at another station, many shoppers still find themselves choosing convenience over cost savings.
The government is subsidizing prices at retail locations
This can be a tough pill to swallow for consumers, but it’s often true that prices are cheaper at wholesale clubs because of government subsidies. That might sound strange, but it’s part of a larger strategy to promote energy production in America.
Wholesale clubs often buy gas in bulk and then resell it later; they make their profit off volume, not price. The U.S. Department of Energy has mandated that gasoline wholesalers must sell gasoline at below-market rates when demand is high or if there is an interruption in supply (like after a natural disaster).
So you’re getting a deal—and helping out Uncle Sam—when you fill up your tank at one of these stores! The catch? You may have to drive farther than you would like to find one.
If you live near a wholesale club, definitely consider taking advantage of their lower prices before heading over to other retail locations. But if you don’t want to leave your house or don’t want to spend more time in line, just pay full price. It’s still less expensive than driving across town!
It’s all about volume
The other reason why the gas price is significantly cheaper at Costco and Sam’s club gas stations is that they both buy gas in bulk, which gets them a discount. Whether you’re buying gas from a large retailer or an oil company, purchasing gas in bulk gets you a discount.
It’s Economics 101, when demand rises and supply stays constant, prices go up. But when demand falls or supply increases, prices go down. When Costco buys gas for its stations, it’s probably getting a better deal than your local mom-and-pop shop because of its size.
As Business Insider points out, The more you buy something, generally speaking, the cheaper the unit price you’ll get. So while there might be other factors at play (like higher taxes), if two nearby stations have similar operating costs but one has lower prices than another, chances are good that the station is getting better pricing because of its volume.
Subsidies from manufacturers
Many of your favorite car manufacturers (BMW, Hyundai, and Nissan, for example) pay large sums of money to gas station operators like Costco and Sam’s Club in exchange for them offering cars at discounted prices—and then all that cash is passed on to you in savings.
To get these deals, consumers have to be members of those gas stations. The membership fee covers their profit margin. So, if you aren’t a member of one of these stores, it could be costing you hundreds of dollars per year!
If you don’t want to buy a new car or don’t need a new car right now, there are still ways to save money on gas: try switching up your driving habits; if possible avoid rush hour traffic by leaving work early or taking public transportation; or drive less often by combining errands into one trip.
The competition keeps prices low
Both Sam’s Club and Costco sell gas, which keeps prices low at both stations. Additionally, they have less overhead than other gas station owners, which makes their gasoline cheaper.
Though they might not be able to compete with independent gas stations on location or service, Sam’s Club and Costco do have some of their tricks up their sleeves when it comes to making sure you can fill up for less. For example, Costco doesn’t accept credit cards at its gas pumps, which is a big cost saving for them.
It also helps keep costs down for customers by encouraging them to use cash instead of swiping a card. As we mentioned above, gas is often cheaper at these warehouse clubs because they don’t have as much overhead as other gas stations.
They don’t need as many employees because there aren’t nearly as many cars filling up during any given shift—and that means fewer employees needed to pump your gas, clean your windows and check your oil. That translates into lower labor costs for those companies—and lower prices for you.
Therefore, these were the above-mentioned reasons why the gas price is significantly cheaper at Costco and Sam’s Club gas stations. Let us know in the comments section if we have missed any information.
