Smith & Johnson is a supply distributor that used activity-based costing to determine the cost of serving its clients. Different clients demanded different services from Smith & Johnson. For example, some clients wanted frequent deliveries of supplies throughout the day and others would buy less frequently and in bulk. After determining the cost of various customers, management at Smith & Johnson determined that some customers were becoming too costly to serve. However, rather than simply drop these customers, the company developed an activity-based pricing system, whereby it began charging customers for the activities they demanded. Smith & Johnson even provided internal cost data from its activity-based costing system to customers, so customers could see how their ordering behavior impacted the costs at Smith & Johnson (justifying differing charges). With this new information in hand, customers worked together with Smith & Johnson to keep costs (and prices) down, while still meeting the needs of their companies.

1) Smith & Johnson had a tremendous competitive advantage when it implemented its activity-based pricing system. Why do you think competitors were not able to implement activity-based pricing immediately to keep pace with Smith & Johnson?

2) What was the key ingredient to activity-based management (the adjustable pricing model) at Smith & Johnson?

3) Can you think of other companies that adjust their prices based on the activities demanded by customers?