Costco Loses Money on Its Famous Hot Dog Deal. Here’s Why It Keeps the Price So Low

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There’s a reason your Costco hot dog is so cheap. Read on to see why. [[{“value”:”

In July, Costco announced some news that shocked many consumers. After a seven-year stretch, the cost of a Costco membership is increasing in September. The basic (Gold Star) membership price will go up from $60 to $65 a year, while the Executive membership price will go from $120 to $130.

In light of this change, you may be wondering if Costco will raise other prices, too — namely, the cost of its famous $1.50 hot dog and soda combo. But during the company’s most recent earnings call, CFO Gary Millerchip said, “I also want to confirm the $1.50 hot dog price is safe.”

Granted, Millerchip didn’t mention specific fee hikes on that call that came shortly after. He only said that they would increase at some point.

But there’s a reason you don’t have to worry about the cost of the hot dog special going up. Keeping that $1.50 price is a big part of Costco’s strategy.

A smart move by Costco

Costco has charged $1.50 for its hot dog and soda combo since introducing it in 1985. If Costco were to raise the price to account for inflation, it would cost about $4.50. But Costco keeps that $1.50 price to get customers in the door and retain existing members.

It’s a concept known as a loss leader, and it’s a strategy retailers employ all the time. Costco might lose a bit of money on its hot dog and soda deal, but it doesn’t care. If that combo inspires customers to keep visiting the store and shopping for groceries and household essentials regularly, then it’s worth it for Costco to take a small hit on that one meal.

In fact, Costco used to make its food court accessible to non-members for the same reason — to get them in the door and inspire them to join. It recently stopped that practice and now limits food court access to members only.

Are the rest of your Costco purchases a great deal, too?

Clearly, $1.50 for a hot dog and soda is a fantastic deal. But what about the rest of the items you buy at Costco?

There’s no clear way to answer this question. If you buy strawberries in bulk at a price that’s lower than your local supermarket but you throw half of those berries out, then you probably didn’t get such a great deal despite the lower cost. If you buy vitamins and supplements you take daily from Costco and pay 30% less than you would elsewhere, that’s a great deal.

The best way to get great value out of your Costco membership is to think through each purchase you’re making and figure out whether it makes sense for you. Regularly compare Costco’s prices to those of other retailers, because it’s not a given that Costco’s offer will always be the best.

But in general, there’s a reason Costco has so many loyal customers who are willing to pay a membership fee to access the store — and it’s not just a cheap hot dog lunch. If you’re savvy with your purchases, you can save a lot of money when shopping at Costco.

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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.Maurie Backman 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.

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