Assorted Afflatuses

I love Costco. It's impossible not to like a store simultaneously peddling diamond jewelry, table saws and grand pianos. Yet, some manage to overlook the warehouse chain's low prices, reasonable membership fees, quality merchandise and reasonable employee compensation. And, more often than not, their distain for Costco stems from the chain's "limited" selection. Their favorite toothpaste is nowhere to be found. Frosted Flakes are an inadequate substitute for Cocoa Puffs. Or the world will come to an end because they cannot part with Puffs for Kleenex.

To be sure, I find Costco's limited selection annoying at times. (Though, I suppose, I'm probably in the minority hoping Costco one day stocks cases of fountain pen cartridges.) But the more I consider Costco's strategy, the more I recognize its brilliance.

From a traditional economic point of view, Costco can offer lower prices, making consumers happy, and help its margins, making employees and stockholders happy, by stocking only a few products. The huge orders it places gives it a great deal of leverage in negotiating fantastic prices on toothpaste or breakfast cereals, much the same way Wal Mart has run traditional toy store chains into the ground with its ability to negotiate great prices on Buzz Lightyear action figures.

More importantly, though, I suspect Costco sells more and makes consumers happier by offering fewer choices. A Costco shopper on the hunt for a fancy new high-definition television set, for instance, can quickly make his or her choice, as the average store only carriers two or three sets in each size. John Q. Customer simply considers the size of his TV cabinet, weighs the prices, looks at the sets to evaluate picture quality and snaps one up.

This has a few effects. First, more people hand Costco more of their hard earned cash. Barry Schwartz, in his excellent tome The Paradox of Choice, notes that consumers faced with an abundance of barely differentiable choices often resolve their problem by not choosing at all. A limited selection tosses that problem out of the window.

Second, Costco makes its customers happier about their decisions. Schwartz makes the point that, with so many other possibilities, consumers not euphorically satisfied with their new food processor or seersucker shirt think one of the countless other food processors or seersucker shirts might have been better. Here it's important to note, in addition to only stocking a certain number of products, Costco also spends a great deal of time ensuring the few products it stocks are great products.

I also like to think Costco's stringent process for weeding out bad products helps consumers make better choices in the first place by nudging them, perhaps forcefully, away from inferior products. By simply not stocking questionable, if dirt-cheap, digital cameras, Costco eliminates consumers' misguided temptation to sink below a certain quality baseline at the sake of price.

Do I think Costco's formula needs some improvements? Sure. Those delicious giant muffins they hawk in the bakery department have probably made more than a few people more than a few pounds heavier. All, in all, though, through brilliant choice architecture, Costco manages not only to improve its own fortunes, but the fortunes of its customers too.