The online retail operation you recently opened is doing well but you are uncertain of your pricing strategy. Currently the typical customer purchases four items at an average price of $11.96 and for an average transaction size of $47.84. The cost of goods is 60 percent of sales, which yields a gross margin of 40 percent. You are considering lowering prices by 10 percent across the board so you can better compete with other music e-tailers. If you lower prices by 10 percent, you believe that the average number of items purchased per customer would rise by 25 percent.
Assuming your assumptions are correct, should you lower prices by 10 percent across the board? If not, do you have an alternative pricing strategy to propose?
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