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One line kept climbing. The other barely moved.

Costco introduced the combo at $1.50 in 1985. More than four decades later, the price is still $1.50. Over the same period, the general price level in the United States has increased several times over.

Image source: Koyfin

At first glance, this looks like a mildly interesting story about inflation. Perhaps Costco accepts a thin margin on one food-court item because customers like it.

But that explanation misses the real value of the decision.

The hot dog is not merely a cheap meal. It is a promise that Costco has chosen to keep making, year after year, even when it would have been economically easy to break it.

And repeatedly keeping a visible promise is one of the ways a business turns trust into a competitive advantage.

What exactly is a moat?

Warren Buffett described it simply:

“A truly great business must have an enduring moat that protects excellent returns on invested capital.”

In the same shareholder letter, Buffett specifically identified being the low-cost producer and named Costco as one possible source of that moat.

A moat is not simply a popular brand, a large market share or a product that customers currently like. It is a structural advantage that makes it difficult for competitors to take away a company’s customers, economics or strategic position.

That advantage could come from switching costs, network effects, intellectual property, regulation, distribution, economies of scale or a cost structure competitors cannot easily reproduce.

Costco’s moat contains several of these elements. It has purchasing scale, limited product selection, high inventory turnover, a powerful private label, recurring membership income and a culture built around giving members value.

But beneath all of these sits something less visible: customers generally believe Costco is trying to give them a fair deal.

The $1.50 hot dog is one small but unusually visible piece of evidence supporting that belief.

Trust is accumulated one decision at a time

Companies often describe trust as though it were part of a branding exercise. They publish reassuring advertisements, write attractive mission statements and tell customers that their interests come first.

But trust is not built through what a company says about itself. It is built through repeated decisions in which the company could have taken more from the customer but chose not to.

Costco could have increased the hot-dog price many times without destroying demand. Moving from $1.50 to $1.75 would probably not cause a serious member revolt. The additional quarter would hardly change anyone’s household budget.

That is precisely why holding the price matters.

There is no commercial necessity forcing Costco to keep it at $1.50. It is a voluntary constraint. The company is demonstrating that not every opportunity to extract additional margin must be exercised.

That decision becomes more credible with time.

After five years, the unchanged price may look like a promotion. After ten years, it begins to look like policy. After forty years, it becomes part of the institution.

Trust compounds because each fulfilled promise makes the next promise easier to believe.

In financial terms, you might think of customer trust as internally generated intangible capital. It does not normally appear on the balance sheet, but it changes the economics of the business.

A trusted retailer requires less persuasion before a purchase. Customers spend less time checking every price against five competitors. They are more willing to try the company’s private-label products. They renew their memberships. They return more frequently and direct a larger portion of their household spending through the same retailer.

Trust reduces the amount of due diligence the customer feels compelled to perform before opening the wallet.

That is economically valuable.

The hot dog as a known-value item

Retailers know that customers do not remember the price of every product in a store. Instead, shoppers tend to judge a retailer using a small number of products whose prices they notice frequently.

Pricing strategists call these key-value items, or KVIs.

A KVI is not necessarily the company’s largest or most profitable product. It is an item that disproportionately shapes the customer’s perception of whether the entire store is expensive or affordable.

Retailers therefore price these visible items particularly carefully. McKinsey describes KVIs as the products that have the greatest influence on value perception; customers tend to remember only a relatively small number of frequently purchased prices.

Costco’s hot dog may be the most famous KVI in modern retail.

The customer may not remember the precise unit price of a 48-pack of batteries, a television, olive oil or laundry detergent. But almost everyone knows the hot dog costs $1.50.

The sign acts as an anchor.

Every time the customer sees it, the price communicates something larger:

We have not forgotten why you joined.

But this does not mean Costco keeps the hot dog cheap so that it can quietly overcharge customers elsewhere. That would be a fragile form of pricing psychology, and it would eventually destroy the trust the hot dog is supposed to reinforce.

Costco’s wider operating model supports the message. The company says its model is based on offering a limited selection at low prices, generating high sales volume and rapid inventory turnover. Those volumes, combined with efficient distribution and reduced product handling, allow it to operate at lower gross margins.

Its stated mission is equally direct: provide members with quality goods and services at the lowest possible prices.

The hot dog works because it is consistent with the underlying system. It is not an advertising slogan pasted over contradictory economics.

Pricing power does not always mean raising prices

Buffett once said:

“The single-most important decision in evaluating a business is pricing power.”

He defined a good business as one capable of raising prices without losing customers to competitors.

That is the conventional interpretation of pricing power: the ability to charge more.

Coca-Cola can raise the price of a bottle without immediately losing its customers. See’s Candies can increase prices because buyers are purchasing more than chocolate; they are buying tradition, familiarity and emotional meaning.

Costco gives us another way to think about the same concept.

The strongest form of pricing power may sometimes be having the ability to raise a price but deliberately refusing to use it.

Costco could probably charge more for the hot dog. Instead, it stores that pricing power in the customer relationship and monetizes it elsewhere - not necessarily through higher merchandise markups, but through greater traffic, larger baskets, membership growth and renewals.

This is latent pricing power.

The company sacrifices a small, immediately measurable amount of margin to strengthen a much larger and more durable stream of customer economics.

It is the difference between maximizing profit from a transaction and maximizing the lifetime value of the relationship.

Costco did not simply absorb the problem

Maintaining the $1.50 price does not mean management ignored its costs.

When the economics of sourcing the original hot dogs became less attractive, Costco shifted toward producing Kirkland Signature hot dogs itself. The company began the transition to in-house production around 2008 rather than simply passing the entire cost increase on to customers.

Vertical integration did not make Costco immune to beef prices, labour expenses or other inflation. It did, however, give the company more control over production, product specifications, supplier margins and scale economics.

This distinction matters.

• A weak business responds to inflation by immediately raising prices.

• A reckless business refuses to raise prices while allowing its economics to deteriorate.

• A strong operator first tries to redesign the economics.

Costco’s response was not merely, “We will accept lower margins forever.” It was closer to, “What must we change operationally so that we can keep our promise?”

That is where culture becomes part of the moat.

A competitor can copy the price. It is harder to copy an organization whose procurement, manufacturing, logistics, product selection and capital-allocation decisions are all shaped around delivering that price sustainably.

Scale economies shared

Investor Nick Sleep used the phrase “scale economies shared” to describe businesses such as Costco.

The normal corporate instinct is to retain most of the benefit created by scale. As a company becomes larger, its purchasing costs decline, distribution becomes more efficient and fixed costs are spread over more transactions. Management can allow those savings to flow into margins.

Costco shares a meaningful portion of those efficiencies with members through lower prices.

That creates a circular advantage:

More members produce greater purchasing scale. Greater scale lowers unit costs. Some of those savings are passed back to members. Better value attracts and retains more members. The larger membership base then creates even more scale.

The customer benefits as the company grows, which makes the growth itself more defensible.

This is a more durable flywheel than one in which all gains from scale are captured by the company. When customers repeatedly receive part of the benefit, they have a reason to keep feeding the system.

The $1.50 hot dog is a tiny, visible demonstration of scale economies shared. Costco becomes larger and more valuable, yet the member can still point to something tangible and say: some of that success came back to me.

The membership model changes the incentive

Costco is not an asset-light company in the strict sense. It owns and operates warehouses, distribution infrastructure and inventory. Building new locations requires real capital.

But the membership layer of the model has unusually attractive economics.

In fiscal 2025, Costco generated $269.9 billion in merchandise sales and $5.3 billion in membership-fee revenue. Membership fees were equivalent to roughly half of the company’s reported operating income, although it would be too simplistic to treat every dollar of fee revenue as pure profit.

The strategic importance of those fees is not just their margin. They alter Costco’s incentives.

A conventional retailer earns primarily when it sells a product at a markup. It is therefore constantly tempted to increase the spread between cost and selling price.

Costco also needs to persuade members to renew.

That means maximizing merchandise margin today can damage membership economics tomorrow. The membership fee encourages Costco to protect the overall value proposition rather than extract the maximum possible profit from each individual basket.

Costco reported a 92.3% renewal rate in the United States and Canada and an 89.8% worldwide renewal rate at the end of fiscal 2025. It had more than 145 million cardholders.

Those figures are the financial consequence of millions of customers repeatedly deciding that the relationship remains worth paying for.

Charlie Munger understood the importance of protecting that relationship. When discussing Costco’s future, he said its moat would remain strong:

“As long as Costco keeps the faith.”

He specifically connected that faith with Costco’s culture and its extreme low-markup policy.

That may be the most useful way to understand the entire business.

The moat depends on Costco keeping faith with its members.

The hot dog is the receipt.

Why competitors cannot simply copy it

Another retailer could offer a $1.50 hot dog tomorrow.

It could even undercut Costco and sell the combo for $1.40.

But a cheap hot dog alone would not reproduce Costco’s moat because the advantage does not reside in the item. It resides in the system surrounding it.

To reproduce the economics, a competitor would need comparable purchasing scale, high inventory productivity, disciplined product selection, low operating costs, a trusted private label, a membership proposition customers are willing to renew and a management culture prepared to sacrifice short-term margin to strengthen long-term loyalty.

More importantly, it would need to demonstrate those behaviours consistently enough for customers to believe they are permanent.

Price is easy to copy.

A forty-year record of restraint is not.

That is why the passage of time matters. Time converts an isolated action into evidence of character.

The longer Costco keeps the promise, the more expensive it becomes for a new competitor to manufacture an equivalent amount of trust.

What is the equivalent in your business?

Every business talks about building a moat. Far fewer are willing to make the decisions that actually create one.

The useful question is not simply, “What can we charge our customers?”

Ask instead:

What is the one promise our customers can observe us keeping repeatedly?

It could be transparent fees, dependable claims settlement, consistent product quality, fast customer support, honest investment reporting, refusal to sell unsuitable products or a price that remains fair even when the customer is not closely watching.

Then ask a harder question:

What profit are we willing to leave on the table today so that customers believe us tomorrow?

Trust cannot be built entirely through actions that are already financially convenient. Customers pay attention when a company protects their interests even when taking more would have been easy.

Finally, consider whether scale improves the customer proposition or merely enriches the company.

When your business gets larger, do customers receive better prices, faster service, higher quality or more reliability? Or does every efficiency gain disappear into the company’s margin?

A moat becomes stronger when customers benefit from its expansion.

The real value of the sign

The $1.50 sign above Costco’s food court does not tell us how much profit Costco earns from each hot dog.

It tells us something more important. It tells members that the company still remembers the bargain on which the entire institution was built: pay us a membership fee, and we will use our scale to stand on your side of the transaction.

That promise cannot be measured by studying the hot dog’s gross margin alone. Its return appears elsewhere - in customer traffic, private-label adoption, basket size, membership renewals and the willingness of customers to trust that the next product is probably fairly priced too.

The hot dog is not Costco’s moat.

The moat is the low-cost system, the scale, the membership structure, the culture and the accumulated trust created by decades of keeping faith with the customer.

The hot dog is simply where all of those advantages become visible.

Sometimes pricing power means raising the price without losing the customer.

And sometimes it means looking at a price you could easily raise, leaving it untouched, and earning something far more valuable in return.

Costco Price Chart

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