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In 1992, Allied Office Products (Allied) had total annual sales of $900 million in business forms and specialty paper products. The key success factors are that its comprehensive product line and its total forms control. All competitors were seeking ways to generate sales growth. In 1988, Allied introduced “Total Forms Control” in 1988, sales from TFC was about $60 million, which includes Pick-back and Desktop Delivery. Allied believed that TFC is the way to differentiate it from competitors in the industry. However, TFC projected ROI 6% -- 1992, down from 20% -- 1988. It might indicate that Allied were not managing the business very well.
Customers are charged the same service fees regardless of their usage of TFC. So some clients are being charged too much and some are being charged too little. Allied has a 20% mark-up on the cost of products and services to earn a profit. Currently, if a client engages in TFC, they are subject to pay an additional 32.2% of product cost. This will need Activity-Based Costing (ABC) system. Let’s analyze the case of customer A and customer B by the ABC system. Both customers have the same amount of sales and the same product cost of $50,000, and under current system they are charged the same price for service sales. However, these two customers consume very different level of services from Allied. So let calculate the true cost that each of these two customers impose on Allied..

Currently, customer A and B both face service charges of 32.2% of product costs, which equals $50,000 * 32.2% = $16,100. Thus, it is apparent that Allied over-charged customer A: $16,100 - $8,481.54 = $7618.46; under-charged customer B: $23,005.56 - $16,100 = $6,905.56.

By using the Service-Based Pricing (SBP), customers are charged for the actual services that are provided to them by Allied. SBP relates to activity based costing, fair to all customers. Thus many customers will face reduced prices. And the profit margin will increase as well.
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