Lose Money on Purpose

Costco sells about 137 million rotisserie chickens a year. Every one of them costs $4.99. That price has held since 2009, with one brief jump to $5.99 during the 2008 financial crisis before Costco brought it back down. In the years since, the price of basically everything else has gone up. The cost of raw chicken has gone up.

The cost of labor, packaging, and energy to cook 137 million birds has gone up. Costco's own CFO at the time, Richard Galanti, said it plainly in 2015: "When others were raising their chicken prices from $4.99 to $5.99, we were willing to eat, if you will, $30 to $40 million a year in gross margin by keeping it at $4.99. That's what we do for a living."

If you showed this to someone who had never studied business, they would think Costco was run by idiots. You're losing tens of millions of dollars a year on a chicken. Just raise the price to $6.99. Nobody would care. The chicken would still be cheap. You'd make back the entire loss overnight.

But Costco won't do it. And the reason they won't do it is more interesting than the standard explanation you'll hear in business school.

The chicken isn't the product

The standard explanation is "loss leader." Costco sells the chicken at a loss to get people in the door, then those people buy other stuff with higher margins. And that's true as far as it goes. The chicken is placed at the back of the store. You have to walk past everything else to get to it. The average Costco shopper drops about $150 per visit, and the rotisserie chicken is a big reason they walk in.

But I think this misses the real mechanism. If it were just about getting people through the door, any cheap product would work. You could put anything on sale. What makes the rotisserie chicken special isn't that it's cheap. It's what the cheapness communicates.

A $4.99 rotisserie chicken in 2026 is an impossible price. Everyone knows this. You can feel it when you pick one up. It's warm, it's heavy, it smells good, and it costs less than a latte. Your brain registers something that goes beyond "good deal." It registers something closer to: this store is not trying to rip me off.

That's the real product. Not the chicken. The feeling.

Costco's co-founder Jim Sinegal understood this intuitively. When the current CEO, Craig Jelinek, came to him saying they were losing their rear end on the $1.50 hot dog and soda combo and wanted to raise the price, Sinegal's recorded answer was: "If you raise the effing hot dog, I will kill you. Figure it out." That combo has been $1.50 since 1984. When a reporter once asked Sinegal what would happen if the price went up, his answer was, "That I'm dead."

This wasn't rational cost-benefit analysis. This was someone who understood that certain prices function as promises. The $4.99 chicken and the $1.50 hot dog aren't products. They're trust signals. They tell your brain, on a level below conscious analysis, that this is a store that is on your side.

But here's the thing I find more interesting than any of that. A signal that relies on the company's good intentions is fragile. Intentions change. CEOs change. Shareholders get impatient. So if you're Sinegal, and you actually care about the signal lasting for decades, you can't just promise to keep the chicken at $4.99. You have to make it structurally expensive for future-you to break that promise. And when you look at Costco carefully, you realize they've done this in two places you'd never think to look.

The 14% rule

There's a number inside Costco that almost no other retailer would tolerate. It's the maximum markup the company allows itself to take on any item it sells. For branded goods, the cap is around 14%. For Kirkland Signature, the in-house brand, the cap is around 15%. That's it. If a vendor lowers their cost to Costco, the savings get passed to the member. If a buyer at Costco finds a way to source an item cheaper, the savings get passed to the member. The markup ceiling is hard-coded into the business.

Compare that to a normal grocery store, where average markups run somewhere in the 25 to 50% range, or a department store, where markups on apparel can hit 100% or more. Costco is voluntarily leaving most of its potential margin on the table. On every single item. Every day.

What's interesting isn't just that the rule exists. It's what the rule does to Costco's own employees. A buyer at a normal retailer who negotiates a vendor down to a lower wholesale price gets to keep the difference as margin, which gets counted toward their performance review, which gets counted toward their bonus. The incentive system rewards extraction. At Costco, that entire feedback loop is severed. Negotiate harder, pass it all through. There's no upside to squeezing anyone, because you don't get to keep what you squeeze.

Think about what that means. Costco has taken the most basic instinct in retail, the urge to capture margin when you can, and removed it from the people who would otherwise act on it. Not with a slogan. With a rule that makes the instinct financially pointless.

Kirkland Signature is the same move, aimed outward

Now look at what Kirkland Signature is, actually. Costco's private label accounts for roughly a quarter to a third of total sales. The official story is that Kirkland is "a high-quality store brand at lower prices." The real story is more interesting.

Kirkland batteries are reportedly made by Duracell. Kirkland coffee, for years, was roasted by Starbucks. Various Kirkland products across the store are manufactured in the same facilities, by the same companies, using the same inputs as the brand-name versions sitting on the shelf right next to them. Sometimes literally on the next shelf. And Costco sells the Kirkland version for less.

Think about what this actually is, from the supplier's point of view. You are Duracell. You sell Costco a certain number of batteries at wholesale. Costco then walks into your factory, contracts with you to make the same batteries under a different label, and puts them on the shelf next to yours at a lower price.

Costco is using its own manufacturing to compete with you. And you agree to it, because if you don't, someone else will, and Costco is too big a customer to walk away from.

That is an absurd thing to do if you think of suppliers as partners. It is a perfectly logical thing to do if you think of members as the only relationship that matters.

And here's where it rhymes with the 14% rule. The 14% cap is Costco removing its own ability to extract margin from itself. Kirkland is Costco removing its own ability to protect its vendors' margins at the member's expense. One rule aims inward, one rule aims outward, but they're the same move. Costco has systematically taken every path that leads to higher prices and blocked it. Not because they promised to. Because they built the walls.

That's what the chicken is actually standing on. The chicken isn't an act of generosity. It's the visible edge of a wall of self-binding commitments the company made to its members, some of which point inward and some of which point outward, and all of which make the chicken's impossible price not just possible but inevitable. The chicken is what the rest of the company looks like when you zoom in on one item.

Now the question becomes: if all of this costs Costco something, what does it buy them? And the answer shows up in two very different places. One is in the P&L. One is in what happens when the system gets tested.

The membership math is the punchline

Members pay $65 a year for Goldstar or $130 a year for Executive. Membership fees account for about 2% of Costco's revenue. They account for roughly 73% of its gross profit.

Read that again. Almost three-quarters of Costco's profit comes from a fee customers pay before they've bought anything. The merchandise, the part that looks like a business, is run essentially at break-even. The actual business is the fee. Costco isn't really a retailer with a membership program bolted on. It's a membership organization that uses retail as proof that the membership is worth it.

This reframes everything in the two sections above. The 14% cap isn't Costco being generous. It's Costco making sure the retail theater is convincing enough that the fee feels justified. Kirkland isn't Costco being anti-brand. It's Costco making sure that when a member walks past the brand-name battery, they see a cheaper Kirkland version on the next shelf and think, yes, this store is on my side, my $130 was a good decision. The chicken isn't a marketing expense. The chicken is a justification expense. Every impossible price in the store is a small down payment on next year's renewal.

And the math works because retention is the only metric that actually matters in a membership business. Costco's renewal rate in the U.S. runs around 90%. A single point of renewal compounded across a hundred and thirty-seven million cardholders is worth more than every margin point Costco could squeeze out of the rotisserie counter. The chicken pays for itself a hundred times over the moment it stops a member from canceling.

The Nebraska stress test

But the P&L can only tell you what the strategy is worth in good times. You don't know what a company actually believes until you see what it sacrifices when believing gets expensive. Costco has been tested on this twice in the last decade, and both times, they answered the same way.

Test one: In 2019, Costco spent about $450 million to build a poultry processing complex in Fremont, Nebraska. A 400,000-square-foot facility that processes roughly a million birds a week, the entire purpose of which is to control the supply chain for a single $4.99 product. A normal CFO would describe that as a wildly disproportionate capital allocation. Costco described it as preserving the price.

Test two: in December 2025, Costco quietly announced it would not proceed with Phase 2 of the same plant. Construction costs had roughly doubled in eight years and the unit economics no longer worked. The textbook move at this point is to raise the chicken to $5.99 to recover the cost. Costco didn't do that either. They cancelled the expansion. The price stayed at $4.99. The signal stayed intact.

Both decisions are the same decision. In 2019, they said: We will spend nearly half a billion dollars rather than let the chicken become ordinary. In 2025, they said: We will break a half-billion-dollar construction plan rather than let the chicken become ordinary.

The direction of the sacrifice flipped. The thing being protected didn't.

Together, the membership math and the Nebraska plant are the same story from two angles. The P&L tells you the chicken isn't a cost. It's the renewal engine, the thing that keeps 90% of members reaching for their card year after year.

The Nebraska decision tells you how far Costco is willing to go when the renewal engine is tested: further than a normal company's board would ever sanction, in both directions. Build to protect. Demolish to protect. Whatever it takes, the price holds.

That's what conviction actually looks like. Not a value statement in an annual report. A wall of structural commitments, a renewal engine that the commitments feed, and a willingness to spend or unspend half a billion dollars to keep the wall standing.

Where founders get this backwards

I think there's a version of this that applies to startups, and it's one that most founders get backwards.

Founders tend to think about pricing as a way to capture value. How much can I charge? What's the market willing to pay? Where's the maximum extraction point? These are reasonable questions. But the most interesting companies I've seen do the opposite in at least one dimension. They find the one place where they can be absurdly generous, conspicuously underpriced, almost suspiciously cheap.

And then they build the rest of the company around making sure that one place stays that way.

The free tier in software is a version of this, but it's become so common that it's lost its trust-generating power. Everyone has a free tier now. The magic of the Costco chicken isn't that it's free. It's that it's a real product, a fully cooked chicken, being sold at a price that feels like a favor. And that the company has demonstrably restructured itself to keep it that way. Free is expected.

Below-cost is surprising. Below-cost defended for sixteen years by capping your own margins, competing with your own vendors, building your own supply chain, and then breaking your own supply chain when defending it that way got too expensive. That's something else entirely. That's a costly signal. And costly signals are the only kind anyone actually believes.

The deeper pattern is this: every company eventually needs its customers to trust it on the things that are hard to verify. Is this product really worth the price? Is this subscription fair? Am I getting a good deal on this bundle? These are questions customers can't fully answer from the outside. So they use heuristics.

They look for signals. And the most powerful signal a company can send is one that costs it money to send, and keeps costing it money, and the company keeps paying it anyway.

Most companies try to earn trust by saying the right things. Costco earns it by structurally removing its own ability to break the promise. The loss isn't a bug in the business model. The loss is the business model. It's the one line item that makes everything else work.

Costco figured this out with a chicken. Most companies are still trying to figure out how to charge more for theirs.