---
title: "2023 Budget: A Few Suggestions on Regional Market Expenses"
description: "In October, most FMCG companies have started their annual budgeting. This article offers several reminders on expense budgeting to help companies avoid repeating the mistakes of the past year."
author: "高级研究员 海游"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2022-10-17"
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# 2023 Budget: A Few Suggestions on Regional Market Expenses

> In October, most FMCG companies have started their annual budgeting. This article offers several reminders on expense budgeting to help companies avoid repeating the mistakes of the past year.

In October, most FMCG companies have started their annual budgeting. We can briefly summarize the core logic of annual budgeting: centered on one origin (market), it expands into four aspects (investment, output, front-end, back-end), leading to eight tasks (promotion expenses, operating expenses, sales contribution, profit contribution, terminal performance, coverage performance, sales team, distribution network). This is also a rough framework for thinking about regional markets.
Today, we offer a few reminders on expense budgeting to help companies avoid repeating the mistakes of the past year.

**01 Macro-level understanding of two dimensions of regional market expenses**
Markets need nurturing, and nurturing costs money. The goal of operations is to make money, so how much to spend and how to spend it is an art. This art is based on single-store output and the limitations of market expenses. The investment principle is to concentrate superior resources to attack on local fronts. Specific market investment includes two parts.

**1. Promotion expenses roughly include four items:**
a. Tiered investment in terminal store customer displays, rebates, etc., dividing outlets by sales volume into levels. Some companies name them diamond, gold, silver, copper, iron customers; others VIP, first, second, third level customers. Implement expense investment according to actual conditions to ensure smooth product display in terminal stores.
b. Investment in market activities and consumer experience to ensure smooth product sell-through at the consumer level.
c. Investment in channel promotions to ensure channel penetration and coverage.
d. Investment in online and offline media support to ensure consumer awareness of the product. Continuously track the cost-effectiveness ratio, i.e., control input-output and balance profits.

**2. Operating expenses roughly include five items:**
a. For brand owners, consider controlling landed cost (production and shipping). Lowering landed cost makes products more competitive.
b. Distributor warehousing: ensure high turnover; holding inventory increases costs.
c. Distributor logistics: plan deliveries and routes to ensure efficient vehicle distribution.
d. Distributor personnel: configure manpower, provide effective incentives, and divide work reasonably to ensure all staff work efficiently and fully.
e. Distributor capital: cash flow is more important than profit. Continuously track, evaluate, and summarize to achieve improvement in all aspects.

General principles: Grade markets and outlets, weigh resource investment effects, and achieve:
a. Be good at accounting: set cost-effectiveness ratios and plan budgets.
b. Be good at allocating: set expense sharing plans.
c. Be good at following up: track sales and expenses.
d. Be good at evaluating: analyze cost-effectiveness and break-even.
e. Be good at adjusting: adjust front-end and back-end investments based on actual conditions.

**02 Suggest FMCG manufacturers invest expenses by product line**
In recent years, whenever FMCG companies consult on expenses, my first suggestion is to budget by product line, and calculate all the way through. Conventional expense budgeting is roughly: first determine the target sales for the year, then based on the company's expense investment plan, calculate the expense rate. For example, a province with annual sales of 100 million yuan and a total expense rate of 5%, then plan the expense scope based on this benchmark, breaking it down by project and month. For products, this is like a "big pot" (equal sharing). Is this scientific? My answer is that it was very applicable ten years ago, but now it lacks consideration of the growth mission of each product line under competitive dimensions.
My understanding is that products can be functionally divided into strategic products (winning the future), traffic products (winning the present), profit products (foundation for survival and development), and disruptive products (improving market competition patterns). Each product has its unique mission. The purpose of expense budgeting is to use "market expenses" as a sharp blade to achieve each product's mission. This is the core of product strategy. However, the budget format based on outlet comprehensive rate assessment is killing this core.
Previously, when I visited Kangshifu instant noodle fourth- and fifth-tier business districts, I found this problem. In lower-tier districts, Kangshifu's strategy of assessing expenses based on outlet comprehensive sales volume and rate caused its products to be eroded by various small and medium enterprises along price bands. The chart below shows BIG bucket being eroded by Baixiang's half bucket with a 0.5 yuan price difference, classic bucket being eroded by Jinmailang bucket with a 0.5 yuan price difference, and also boxed Jinshuang noodles, crispy noodles, etc. To add: Kangshifu invests almost no expenses in these outlets (except some channel gifts) because sales do not meet standards, and some products sell well but still have no expenses. Other brands discovered this loophole and focused resources to erode.
What are the benefits of budgeting by product line? I summarize the following points:

**1. Break the "big pot" of expenses, giving each product its own opportunity to grow and fulfill its mission.** If some products are simply cut off without expenses, like Kangshifu, the noodle leader, they will be "unaccustomed" in some low-tier markets and eventually be eroded by other brands.

**2. It is more conducive for frontline staff to operate the market.** Some may say this contradicts the principle of expense concentration, but essentially it does not. Product development imbalance is common in all enterprises. Brand owner's Product A sells well in one region, while Product B sells poorly, and vice versa in other regions. What to do? The expenses for Product A and Product B can be used interchangeably. This makes frontline staff realize that to develop Product A, they "borrowed" expenses from Product B, allowing flexibility while fully engaging them in operations and fostering a business mindset.

**3. More favorable for market competition.** Outlets with high sales of high-margin products can invest higher expenses, especially in markets with intense category competition, making it easier to maneuver.

**4. More flexible use of market expenses and more precise investment.** For example, expense investment plans can be redesigned based on different SKU sales at different outlets, achieving precision and efficiency.

**03 Avoid the "Tragedy of the Commons" in annual expense budgets**
The tragedy of the commons means that people overuse public resources, leading to resource depletion. Although good use of public resources can bring long-term benefits to the collective and each individual, individuals are always tempted by the "why not take some" mentality, adopting selfish short-term strategies, leading to the exhaustion of public resources.
In next year's budget, typically the group headquarters will reserve a certain proportion of expenses (e.g., if the expense budget based on next year's sales is 100 million, reserve 10 million for headquarters) for flexible use by major regions. Headquarters thinks: regional heads will not waste money because that would reduce profits, and their year-end dividends or bonuses would decrease. But in reality, at year-end inventory, it is found that this reserved portion is not saved but often spent without value. So where is the problem? Why do regional heads try every means to get this money, even the most frugal people come up with countless reasons to spend the public budget pool without restraint? The reason is simple: it is a commons. When each regional head has both departmental and public budgets, they will try to spend the public budget first, because even if I don't spend it, others will; I can't stop them, so spend it first. This eventually leads to the tragedy of the commons.
How to solve this problem? Two suggestions:

**1. Reduce or eliminate the "commons."** Whose expense it is, it belongs to them. Headquarters should not reserve or reserve very little. Allocate all budgets to regions. When the money is mine, management will not have the mentality of "if not spent, it's wasted."

**2. Combine spending with assessment.** Markets are flexible and ever-changing; some unexpected expenses cannot be cut off with a one-size-fits-all approach, but they must be assessed: first, cost-effectiveness (meeting standards); second, profit loss (affecting team year-end profit bonuses).

**04 The link between expenses and reimbursement**
Every expense usage basically has a fixed process: marketing activity plan - activity execution - activity check - case closure and reimbursement - activity analysis. Here I want to mention the case closure and reimbursement step.
Many distributors and frontline salespeople dislike expense reimbursement the most. Common situations include:
_1. Some companies' cumbersome reimbursement systems are frustrating; frontline staff spend a week or more sorting out reimbursement materials._
_2. Some actual expenses cannot be reimbursed due to various constraints, causing distributor losses and negative attitudes._
_3. Unreimbursed expenses lead some quality outlets to refuse cooperation._
_4. Rigid expense mechanisms confine market personnel's thinking, leaving them helpless in responding to sudden competitive changes._
I offer the following operational suggestions:

**1. Simplify the reimbursement process with the end in mind, changing from multi-dimensional assessment to single assessment.** For example, if the purpose of the expense is sales, then if backend data shows sales meet the standard, it can be reimbursed (no need for salespeople to organize materials). If the purpose is brand building, salespeople can take photos once a week, four times a month, showing qualified displays from terminal machines, and it can be reimbursed (clerks review, salespeople also do not need to organize materials).

**2. Do not put too many "shackles" on expense usage.** For example, reimbursement expenses have both existing and incremental performance requirements, and category-specific achievement indicators, both payment amount requirements and shipping time requirements. Too many "shackles" make distributors use expenses with fear and hesitation, which is essentially counterproductive.

**3. Clarify the roles and responsibilities of each party in the expense usage and reimbursement process.** Common practice: frontline offices provide lists of outlets that can do displays and rate requirements; salespeople select outlets from the list and implement displays; terminal store owners maintain displays; distributors handle timely delivery and expense settlement; office market personnel handle case closure and reimbursement.
Case: An outlet had the terminal store owner maintain displays as required, but the rate did not meet the standard, so reimbursement failed, and the display reward was not given. Is this correct? I think it is wrong. The store owner did the display maintenance and should receive the display reward. If sales did not meet the standard, it is the problem of the people who selected the outlet, and the store owner should not be implicated.

**4. Strengthen the flexibility of the expense mechanism.** Generally, the right to use expenses should be delegated to frontline supervisors. Like soldiers on the battlefield, if they find the enemy, firing a bullet does not require application. Secondly, there should be a fast-track expense application channel to respond to market competition. If you miss a step, you fall behind step by step. Market competition is increasingly fierce, and resource investment must pay attention to timeliness. Market opportunities change rapidly; do not waste them.

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