Lesson 3 of 8
Customer captivity
Costco reported a 92.3 percent member renewal rate in the US and Canada for fiscal 2025. That implies an average membership of about thirteen years.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Three things keep a customer: habit, the cost of switching, and the difficulty of assessing an alternative before trying it.
- Costco disclosed member renewal rates of 92.3 percent in the United States and Canada and 89.8 percent worldwide at the end of fiscal 2025.
- A 92.3 percent annual renewal implies an average relationship of about thirteen years, which is the number a thesis can carry a guardrail on.
Customer captivity is the most asserted and least measured of all claimed moats. It is also, where a company discloses a retention rate, the easiest one to put a number on.
Costco member renewal, and the membership life it implies
| Measure | United States and Canada | Worldwide |
|---|---|---|
| Member renewal rate at the end of fiscal 2025 | 92.3% | 89.8% |
| Implied annual loss rate | 7.7% | 10.2% |
| Implied average membership, in years | 13.0 | 9.8 |
| Paid members at 31 August 2025, in thousands | 81,000 | |
| Membership fee revenue, fiscal 2025, in millions | 5,323 |
Three reasons a customer stays
Mauboussin, Callahan and Majd group these under consumer advantages. Habit is the first: a product need not be unambiguously better, only preferred by some consumers, and the advantage is largest where the product is used habitually.
The second is switching costs, where a customer must bear a cost to move from one product to another. The third is the experience good: a product a customer can only assess by trying it, which lets the incumbent hold an advantage built on image, reputation or credibility, because the alternative cannot be judged in advance.
Each leaves a different trace. Habit shows in frequency of purchase. Switching costs show in contract length and in renewal. The experience-good advantage shows in the cost a challenger has to spend to be tried at all.
What a disclosed renewal rate is worth
Costco's filing states the rate directly, and states its construction: it excludes affiliates of business members and is a trailing calculation covering renewals in the period seven to eighteen months before the reporting date, with memberships expiring in the six months before the period end excluded.
That definition matters more than the number. A retention figure with no stated construction is not comparable to anything, and two companies quoting ninety percent may be measuring different things.
Turning a rate into a duration
If 7.7 percent of members leave each year and the rate holds, the average membership lasts about 1 divided by 0.077, or 13.0 years. Worldwide, at a 10.2 percent loss rate, it is about 9.8 years.
That arithmetic assumes a constant rate, which is an assumption and not a finding. But it converts a percentage into the unit a valuation actually needs, which is a number of years of revenue from a customer already acquired.
The guardrail this produces
A thesis resting on captivity should carry a rail on the renewal rate, not on margin, because the rate is the thing that moves when the captivity weakens. The filing itself names two forces pushing on it: a higher share of memberships sold online, including through digital promotions, which renew at a slightly lower rate on average, and growth in newer international markets.
Check yourself
What renewal rates did Costco report at the end of fiscal 2025?
- 78.5 percent worldwide only
- 92.3 percent in the United States and Canada and 89.8 percent worldwide
- 99.1 percent in both
Show the answer
Answer: B.
The filing gives both figures and also states the construction of the measure, which is what makes it comparable across years.A 92.3 percent annual renewal rate implies what average membership length?
- About 1.9 years
- About 13.0 years, being one divided by the 7.7 percent loss rate
- About 92 years
Show the answer
Answer: B.
The conversion assumes a constant loss rate, which is an assumption. It turns a percentage into the years of revenue a valuation needs.Why watch the renewal rate rather than margin in a captivity thesis?
- Margin is not disclosed
- Because the renewal rate is the thing that moves when the captivity weakens, while margin holds until the barrier has already failed
- Because renewal rates are audited
Show the answer
Answer: B.
A guardrail has to sit on the variable that moves first. For a barrier, that is the barrier itself.Sources
- Costco Wholesale Corporation, Form 10-K for the fiscal year ended 31 August 2025, filed 2025-10-08, accession 0000909832-25-000101: member renewal rates, their construction, paid membership counts, membership fee revenue, and the factors the filing names as affecting the worldwide rate.
- Mauboussin, Callahan and Majd, Measuring the Moat, Credit Suisse, 1 November 2016: habit and horizontal differentiation, switching costs and customer lock-in, and experience goods.
What this leaves out
- The implied membership durations are this course's arithmetic and assume the loss rate stays constant, which no filing claims.
- Costco's renewal rate excludes affiliates of business members and is a trailing calculation over a stated window, so it is not directly comparable to a retention figure computed differently elsewhere.
- Membership counts include memberships that have expired and not renewed within the twelve months before the reporting date, as the filing states.
- Nothing here is a view on Costco or on any security.