Costco just announced that they are raising their annual membership fee 10% in the US and Canada as of November 1st, 2011. This makes the Gold Star and Business memberships $55 and the Executive membership $110 per year. The maximum 2% cashback reward that comes with Executive Membership will increase from $500 to $750. The last price hike was in 2006, so the membership fee has actually been rising less than inflation. See Costco press release, WSJ article.

Is Costco worth it? As someone who shops at Costco regularly, I’ve asked Is the Executive Membership upgrade worth it? (You can’t lose money by trying it out.) This time, I thought it would be interesting to look at how the Costco business model itself affects the value to customers. There are various articles about the Costco business strategy, for example here, here, and here. This is a quick and dirty summary:

• Costco tries to make a low but constant profit margin, combined with large volume. Two metrics for this are operating margin, and sales per square feet. Costco keeps around a 3% operating margin, which means for every dollar in sales they get 3 cents of profit before things like interest and taxes. They don’t want this number higher (more room for competitors), or lower (race to zero). Costco has more sales per square feet than Wal-mart, Home Depot, or Nordstroms. They keep this high with low prices, bulk packaging, and limiting selection.
• Instead, most of the profit can be seen as coming from membership fees. Roughly half of the 22 million members in US and Canada are Gold Star/Business members paying $50 a year, and the other half are Executive members paying a $100 a year but with a 2% cash back check. Simple math says that Executive members should be spending $2,500 a year at Costco for this to be a good idea ($2,500 x 2% = $50). Spend $5,000 a year, and your membership is “free”.
• They treat their employees better with higher pay and benefits than say Wal-mart or Sam’s Club, as well having better stats for upward mobility. One number given was Costco pays 40% higher than Sam’s Club. I think this makes for a more stable operation and less employee turnover.
• They treat their customers better with a generous lifetime return policy. They’ve had to tighten it up with customers abusing the policy by returning TVs every year before the Super Bowl and buying a new one (now limited to 90 days on electronics), but it’s still very customer-friendly. I’ve seen people return empty wine bottles.

What’s the result? I like to look at it this way – at the two extremes:

• If you buy nothing and they can’t make any profit on markups, they’ll still charge you the $50 membership fee.
• If you buy $5,000 of stuff and get the 2% cashback, your membership fee is basically free ($100 minus $100). If you remove membership fees, you’ll find their retail profit margin is actually a thin 1%. I visualize this as the 3% overall margin minus 2% cashback. That leaves them with 1% of $5,000 = $50 again. Coincidence?

In the end, Costco makes money even with such low profit margins, as long as they keep you as a happy customer. Over 90% of people renew membership every year. This leaves Costco only concerned about expansion of members. In fact, they have a rule that they never charge more than 15% of the cost of any product. That’s tiny in the retail world. Remember, they still need to pay for the building, worker wages, and so on. As a result, Costco prices will always be “very good”, but it can be beat by short-term sale prices of an aggressive competitor or “extreme couponing” at grocery stores.

For some perspective, Wal-mart’s operating margin is around 6%, and Target’s is almost 8%. Since the basic membership fee is $55 a year soon, your only hurdle is to buy enough stuff to make the $55 worth it. Assuming based on the operating margins that Costco prices are 3% cheaper than Wal-mart, you’d have to spend $1,833 a year (about $150 a month) at Costco instead of Wal-mart to pay for the $55 membership fee.

Based on these assumptions, if you are someone who is satisfied with all-around competitive prices and doesn’t want to hunt for the best deal all the time, and would be spending more than $150 a month at Costco, then the new membership fee should be still worth it. Our family got $88 cash back last year.

If you do go for it, you can get 3% cash back on gas, 2% cashback on restaurants, 2% back on travel, and 1% back on everything else with the TrueEarnings Card from Costco and American Express, which also replaces your Costco membership card.

I’m normally not excited by water heaters, but I do love the idea of investing small money upfront to lower my expenses and save big money in the future. We currently have a 10-year old electric water heater which I’d like to replace soon due to age and inadequate size. We live in a warmer climate and thus considered a solar hot water heater, but the combination of cost and having to cut and install water pipes through our roof didn’t sound especially fun. I just saw that until October 5th, Lowe’s is selling the GE GeoSpring 50-Gallon Hybrid Electric Water Heater for $999. Currently, both GEAppliances.com and Sears also have it at $999. If you can get free delivery in your area, one may be cheaper than the other. Both Lowe’s and Sears offer another 5% off if you have their store credit card.

Tax credits. There is a Federal tax credit of $300 available on electric heat pump water heaters. In addition, check for state energy rebates here, and you may get even more back (look carefully, as many states have already exhausted their rebate funding). Without anything local available for me, this makes the net cost $700. A conventional 50 gallon electric heater with a shorter warranty can be found for about $300, with a 9+ year warranty runs about $400. This makes the cost difference with no state credits to be no more than $400. Both could be installed yourself if you’re handy, otherwise installation is extra.

Potential $2,400 in savings. With average electric cost assumptions, this heater is supposed to save about $25 a month, or $320 a year in electricity costs. If you have your electric bill handy, you can do the math yourself as a 50-gallon standard electric tank water heater uses about 4881 kWh per year vs. the GE Hybrid water heater at 1856 kWh per year. Using their standard numbers, this hybrid system would pay for itself less than two years. Assuming a 10-year usage, you would then have 8 years x $300 a year = $2,400 of potential total savings.

What’s a hybrid water heater? It’s called a hybrid because it can heat up your water using a heat pump as well as the conventional electric resistance coil. I was having flashbacks to my thermodynamics college courses while learning about it, but essentially a heat pump takes the heat from ambient air and transfers it into the water. This is kind of like an air conditioner in reverse, which takes the heat in the air and moves it outside with the aid of a refrigerant like Freon. The heat pump is more energy efficient than the electric coil, but slower, so the coil is still there as a backup during times of high demand. A heat pump works better in warmer climates, as there is more heat in the air. You’ll also end up with condensation which will need a drain unless you want to empty out a water pan every few days.

The added complexity of the heat pump does make for more things to go wrong, which is why I suppose it comes with a rather long warranty. It is worth the upfront investment? I think so for us, but I’ll haven’t fully run the numbers on a similar whole-house tankless system. Thoughts?

An article this week on GetRichSlowly about frequent flier program basics mentioned a WSJ article that I’ve never seen about which airlines make it easiest for you to redeem your miles. The research was done by a consulting firm IdeaWorks Co, which looked for awards equivalent to a domestic roundtrip flight using 25,000 miles “saver” award level. Here are the results:

JetBlue (79%) and Southwest (99%) are tops for domestic carriers. Alaska, American, Continental, and United all had seats available at least 60% of the time or better. Delta and US Airways were at the bottom of the list, with flights up for grabs only 1 out of 4 tries. I’ve mentioned that my parents are served by Delta and I’ve definitely wrestled with them over award flights, and only by booking well ahead of time and being flexible we’ve still managed to get by.

I have no real loyalty towards any airline, which is why I still prefer the flexibility of the Starwood American Express card for racking up my miles and hotel points. I use it for hotels whenever I can, but also to top off my accounts when I finally reach an award I want to redeem. I’m glad there are articles like these to publicly shame airlines like Delta into improving their awards availability.

I haven’t mentioned these in a while. Restaurant.com is running one of their temporary 80% off sales on their $25 certificates (Regular price $10) with coupon code TASTY. Offer valid through 8/31 at 11:59PM PST.

Despite my initial skepticism about these things, many readers responded that they indeed found these certificates very useful for saving money. Always note the restrictions (dine-in only, not valid Friday night, etc.) which can vary for each place.

Here’s an example of how the savings math might work out. You find a restaurant on the list that you like that usually runs around $20 + tip per person (~$48 for a couple). You buy a $25 certificate for $1, which usually comes with a $35 minimum purchase + 18% required gratuity on full price.

If you haven’t searched them in a while, they’ve been adding more restaurants to the list. I use these when I travel as well, so if you know of a good restaurant value in a big city, please share the name and location in the comments.

If you are under a Sprint cell phone contract and want to get out of it without paying the steep Early Termination Fee (ETF), check your statements with a billing date in August. Look for the following text:

Administrative Charge Increase & Terms & Conditions Changes for Consumers
Effective 9/9/11, the Administrative Charge will increase to $1.50 per line for customers that receive the charge. For details, visit Sprint.com/taxesandfees. In addition, the Sprint consumer Terms (Ts&Cs) are changing. Please review them carefully at your local Sprint store or Sprint.com/termsandconditions.

You may be “stuck” in a contract, but a contract runs both ways. Sprint is also “stuck” and can’t go increasing your monthly bill whenever they want. The law states that if a company makes a material change to the contract, then the consumer has the ability to exit the contract without an ETF if they notify Sprint within 30 days of the notice. As stated on their own fees page: “The Administrative Charge is not a tax and is not an amount we are required to collect from you by law.” From the Sprint contract:

You may terminate each line of Service materially affected without incurring an Early Termination Fee only if you: (a) call us within 30 days after the effective date of the change; and (b) specifically advise us that you wish to cancel Services because of a material change to the Agreement that we have made. If you do not cancel Service within 30 days of the change, an Early Termination Fee will apply if you terminate Services before the end of any applicable Term Commitment.

I believe this admin charge used to be 99 cents per line. However they rephrase it, this is a price hike and thus a “material change”, pure and simple. If it wasn’t material, they wouldn’t be raising the prices on their 50 million customers x $0.50 extra = $25 million per month in additional revenue!

Many users on this Slickdeals post as well as some MyMoneyBlog readers have already reported success. You may need to ask for the Retentions Department or a supervisor, but don’t them talk you out of it. Sprint knows what they are doing, they just wanted to minimize the publicity, this already happened back in January 2010. One additional tip for some folks who want it is to ask for your line to be marked “out of contract”. This will allow you to simply exit your contract, but continue your service on a month-to-month basis. If not, you can ask to cancel at the end of the month to allow time to port your phone number to another carrier. Finally, they may offer you some sort of cash credit or other incentive to stay in contract.