Here’s how companies like Target may decide which prices to cut

CHRIS FARRELL: Dedicated Target shoppers, you may have gone to the store and you've seen lower price tags for some foods and household items. So the company announced last month that it cut prices for 1,500 items, and it would do so for about 3,500 more throughout the summer. The reason? The Minnesota-based company says it aims to help consumers save money.

It's not the only company to make this kind of announcement recently. Walgreens is another. Joining me to help read between the lines is Professor Akshay Rao of the University of Minnesota's Carlson School of Management. Glad you could join us.

AKSHAY RAO: Happy to be with you, Chris.

CHRIS FARRELL: OK, so, Target says it's out to help consumers. What do you see as behind the company's decision to lower prices? Help the consumer?

AKSHAY RAO: Well, there are multiple motives that the corporation has when they make pricing decisions, as I try and explain to my students over 14 weeks when I teach them my pricing strategy elective. But underlying it all, as you well know, Chris, is the impetus to make money.

And if consumers are becoming increasingly price sensitive and are abandoning your brand because your prices are too high, then it behooves you to look carefully at your prices and determine if you can make more money by lowering your prices. The question that comes up is, why now?

CHRIS FARRELL: Yes, exactly.

AKSHAY RAO: What took you so long? Because consumers have been complaining about prices for a while. And perhaps legitimately and perhaps not, but there is a perception in the marketplace that the sky is falling on our heads. If you look at the recent Harris poll data, there is a remarkable and astonishing inconsistency between reality and perception with respect to the state of the economy, whether it be how the Standard & Poor's Index is doing, what's going on with inflation, and so on and so forth.

And the drivers of those perceptions, I suspect, are at least twofold. One is there is a segment of consumers out there that is constantly being told that the sky is falling on their heads. And in point of fact, the data indicates that there is a political ideology-based difference with respect to perceptions about the state of the economy and how well or poorly things are going.

CHRIS FARRELL: Yeah.

AKSHAY RAO: So put that in the mix, and you have a corporation looking at its customers, saying, all right, we better do something to keep these people loyal if they're becoming increasingly price sensitive. So I suspect that is the predominant mode of driving the behavior of Target and Walgreens and Walmart and so on and so forth.

CHRIS FARRELL: So what do you think of this-- I don't know if it's a theme, it's a meme-- that's been around, really, ever since inflation took off, that this is greedflation, that companies have taken advantage of the current situation to hike prices as much as possible.

AKSHAY RAO: Right, and this is, again, a perception, and I spoke to one of your colleagues over the weekend about this precise topic. It turns out that corporate profits have varied considerably across sectors as input costs have gone up. So when a corporation faces a supply chain shock, and they're confronted with increasing costs, then one way to deal with that circumstance is to raise their prices.

The other is to do-- now the popular term for that is shrinkflation, which is to provide lower quantities of product or service for the same price. But when that is accompanied by increasing corporate profits, then one needs to ask the question, is a corporation taking advantage of increased costs to make more money?

It turns out that it varies by sector. And we do know that the fossil fuel industry did rather well when they were confronted with the supply chain shock. But it's not the case across the economy. There was a recent study that showed that at the macro level, that is, in fact, not the case. So I hesitate to attribute malintent to corporations with respect to taking advantage of an act of nature or a circumstance beyond their control to gouge consumers. I'm not sure that was the case across the board.

CHRIS FARRELL: So, what do you think? I mean, these are brand name companies-- Target, Walgreens. Is this a signal that we can take that prices are going to be coming down? Probably not for everything, but now there's more downward pressure on prices than before.

AKSHAY RAO: This is an excellent question. And unfortunately, my crystal ball is in the shop.

CHRIS FARRELL: [LAUGHS]

AKSHAY RAO: It needs servicing. Because the last time I checked with it, it gave me a prediction that turned out to be completely inaccurate. So to be able to predict the direction of prices or the stock market and so forth is not something that I'm comfortable doing.

I will tell you that there are a couple of factors to keep in mind as one contemplates the shape of prices. So we're entering the summer driving season. And we know-- I've been watching this now for 35 years. We know what happens to the price of gas in the summer, not just the price of gasoline, but the price of diesel and everything else.

And why is this important to keep tabs on? Again, this is an input cost in the transportation and distribution of products and services. So every product has to move from point A to point B, and if the costs of transportation go up, then the input costs has gone up. And so whoever is going to sell that product to you has to account for that in the prices that they set.

And this is not restricted to just products. Even services are sensitive to changes in the cost of transportation. Your hairdresser has to drive to work, and if the cost of gasoline goes up, then his or her costs of getting to and from work go up. And a rational hairdresser would factor that into the prices that they charge. So where I'm getting to with this sort of long-winded preamble is, anticipate that there is going to be some upward pressure on prices for products and services that are sensitive to transportation costs.

CHRIS FARRELL: OK, so what's the consumer to do? I mean, you think about a company like Target. It has all the data analysts, and they're analyzing all this data. So what's the consumer to do? They just want to be smart with their money. They want their dollar to go farther. So any advice for the consumer?

AKSHAY RAO: So, two pieces of advice. One is shop around. It is costly to search for price information because prices are dynamic. They change constantly. And you checked and found the lowest price for that ticket for your vacation, and you check back 10 minutes later, and the price has changed. So, keep that in mind.

And then keep in mind that there's a point at which searching for information may not yield the benefits that you're looking for. So focus on quality as well. Because when you're constantly maximizing looking for the best possible price, the best possible deal, you're unlikely to find it. You're going to wind up experiencing considerable regret.

So, to some extent, be a satisficer and have a budget. And when you are within your budget, just make the purchase and move on and enjoy the rest of your life. Because there is more to life than minimizing price. It is maximizing utility. So there's more to life than getting the best deal.

CHRIS FARRELL: I think that's good advice in general. Very much so.

AKSHAY RAO: That's the truth.

CHRIS FARRELL: Yeah. [LAUGHS] Well, thank you very much for your time. I really appreciate it.

AKSHAY RAO: You're very welcome. The pleasure was entirely mine.

CHRIS FARRELL: Akshay Rao is the General Mills Chair in Marketing at the University of Minnesota's Carlson School of Management.