---
title: "Crafting a Cost Strategy: Ensuring Every Penny Counts"
description: "A comprehensive and detailed cost budget can concretely and powerfully support a company's business strategy. To achieve this, it is essential to plan cost categories well, using the marketing 4Ps as a framework, and to manage costs transparently and rule-based, including clear cost-sharing ratios with distributors."
author: "高级研究员 海游"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
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published: "2022-12-20"
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# Crafting a Cost Strategy: Ensuring Every Penny Counts

> A comprehensive and detailed cost budget can concretely and powerfully support a company's business strategy. To achieve this, it is essential to plan cost categories well, using the marketing 4Ps as a framework, and to manage costs transparently and rule-based, including clear cost-sharing ratios with distributors.

**Introduction**: A comprehensive and detailed cost budget can concretely and powerfully support a company's business strategy.

**Plan Cost Categories Well**
Many companies have sound cost processes, from budget, application, usage, verification, reimbursement, to accounting—a complete closed loop. However, cost category planning is often missing or mismatched with current operations. Essentially, we can plan cost categories through the marketing 4Ps.

**1. Product Costs:** Apart from R&D costs, marketing teams mainly deal with two types of costs. First, new product launch promotion costs, including listing fees during the introduction phase and new product promotion costs. Second, operational costs for sustaining existing products, including ongoing consumer communication activities and brand exposure events for major occasions. The purpose of these costs is to ensure products smoothly open up channel opportunities.

**2. Price Costs:** Price levels determine the profit competitiveness of the channel chain. Many companies with mature products blindly pursue sales targets, neglecting the maintenance of the price system. Low-price dumping leads to insufficient channel push and hidden sales at retail points. In the past year, raw material costs have risen, making it easy for brands to raise prices, but consumers may not accept them, further squeezing distributors' margins. Over time, products may face extinction. Therefore, using reasonable means to enhance consumer purchase willingness requires the effect of price maintenance costs. The purpose of these costs is to maintain a reasonable price system.

**3. Channel Costs:** This category accounts for a significant proportion. Analyzing the channel chain F2B2b2C, at the distributor level, costs include code fees and annual rebates; at the retail point level, display fees, product sales policy costs, and rebates for quality outlets; at the consumer level, gift costs and free sample costs. The purpose of these costs is to ensure products smoothly reach consumers from the factory.

**4. Promotion Costs:** Promotion costs mainly include brand communication costs and product promotion costs. Brand communication includes media ads on TV and social media, and ground ads on vehicles, walls, and store signs. Product promotion costs include wages for promotional guides, venue, materials, and activity costs. The purpose of these costs is more focused on brand building.

Image source: Internet

Summary: The above cost list is just a brief overview. The actual granularity of cost categories is much finer, but not necessarily the finer the better; it must match your organization. Marketing 4Ps can be a dimension for dividing cost categories, and many brands plan this way. What needs attention is that for long-term development, manufacturers must focus on product competitiveness, channel competitiveness, and consumer competitiveness, so the focus of cost planning should be clear.

**Streamline Cost Management**
FMCG companies spend such high costs annually. If these costs can be managed more efficiently and accurately, it will become a significant asset for the company. Common FMCG cost management includes administrative costs, market costs, and financial costs, with market costs being the most important, significantly higher than the other two. FMCG companies have the following five characteristics in cost management:

**1. Fine Cost Classification:** FMCG marketing costs can be subdivided into hundreds of subcategories. Different cost categories affect the company's control intensity, control standards, and even payment outcomes.

**2. High Product Granularity:** FMCG products are highly homogeneous and easily substituted. Companies need to segment markets based on consumer types, geography, and capabilities, leading to higher product granularity.

**3. Large Regional Span:** FMCG products target a broad consumer base, and due to low brand loyalty, consumers prefer convenient purchases. Therefore, regional terminal distribution needs to be wide, deep, and detailed.

**4. Multiple Channel Types:** The FMCG industry often says, "Terminals are king, channels win." Channel construction is a key success factor for FMCG companies.

**5. High Complexity:** FMCG companies are often required to manage processes with both macro and micro attention, and different organizations, product lines, or channels within the same company have varying requirements for cost management, making actual management difficult.

Summary: After detailing cost categories, the next key is cost management, which is a crucial part of the cost strategy. Companies need to match corresponding management strategies with cost categories.

**Cost Sharing Ratio**
**Must Be Transparent and Rule-Based**
Today's FMCG market cannot rely solely on brand investment; distributors also need to invest as necessary. In fact, many brands do this, but what is lacking is transparency and rule-based cost-sharing ratios, leading to conflicts between manufacturers and distributors. Transparency and rule-based sharing ratios are important principles of cost strategy, reflected in all aspects of cost investment, based on win-win cooperation.

For example, a company has established strict price systems and market fee rate coefficients, preserving reasonable distributor profits. During peak season channel promotions and key outlet displays, the manufacturer-distributor cost-sharing ratio is 8:2. The business terminal system implements and verifies costs, while the financial system manages total costs and reimburses according to the agreed ratio. From application to closure, both parties can view the process in the system, ensuring openness, fairness, and justice, maintaining the manufacturer-distributor relationship.

It should be noted: when asking distributors to bear costs, you must understand their operating status and profit/loss situation. For the cost gap of a specific marketing activity, when coordinating with distributors, first explain the importance of the activity and what the company can support. What does the customer need to contribute? After the activity, what will the distributor's profit level and total profit be? As long as there is no loss and total profit increases, customers generally support and cooperate actively. If the customer is unwilling to contribute, what would be the sales and profit situation? Alternatively, provide the customer with the company's activity details and cost indicators, and ask them to propose a feasible plan to optimize the plan, achieving coordination through customer-led voluntary contribution.

Second, coordinate costs with the channel. For routine channel costs like displays and end caps, we can use promotional activities or gifts to exchange for reductions, saving routine costs and increasing variable cost quotas.

**Common Problems in Cost Strategy**

**1. Unreasonable Cost Allocation Standards:** Some companies allocate costs based on a uniform cost rate, giving more to regions/customers with higher sales. In many companies, marketing costs are allocated based on past sales performance, but in reality, due to differences in products, regions, and distribution channels, the costs to achieve the same sales volume vary greatly. Some cost inputs have weak correlation with output and require upfront investment, sometimes large with slow returns, or the value is not reflected in sales. Some companies even allocate costs based on personal relationships, giving more to favored businesses or customers and less to others, with managers' subjective decisions determining allocation.

**2. Low Cost Efficiency:** When conducting promotional activities, companies often focus on cost application but lack activity planning and process management. Often, money is spent but results are hard to see, a common execution problem due to insufficient cost monitoring and process management.

**3. Untimely Cost Reimbursement:** The current model where distributors advance market costs has issues with long reimbursement cycles, affecting distributor enthusiasm. Slow reimbursement is due to incomplete distributor documentation and slow reporting, as well as lengthy internal approval processes.

**4. Lack of Evaluation of Cost Effectiveness:** Many companies lack effective evaluation of market cost usage, so there is little guidance for future activities. The reason is a lack of data collection and effective analysis.

**5. Costs Becoming Gray Income:** Some sales personnel may falsify promotional expenses for personal gain or to help distributors meet sales targets, defrauding the company's limited funds. Distributors may also use false invoices to convert company market costs into their own profits.

**Operational Suggestions for Cost Strategy**

**1. Costs Must Be Budgeted:** A comprehensive and detailed budget can concretely and powerfully support business strategy, helping companies carry out specific operations systematically and rationally, avoiding blindness, impulsiveness, waste, and even profit deficits due to lack of overall budgeting.

**2. Strict Cost Application and Execution:** Cost applications must be based on promotion strategies, with a promotion plan as the basis. Whether costs are executed depends on whether the promotion plan is executed and its effectiveness. Ensure closed-loop management of all company costs, striving for transparency in application and execution.

**3. Establish Cost Usage Policies and Review Processes:** To ensure correct use of budgets by all departments and sales personnel, companies should establish a complete set of cost usage policies and review processes. Cost usage must be standardized, and business personnel and distributors should be informed of the company's cost usage processes and institutional requirements, with clear penalties for violations.

**4. Regularly Audit and Evaluate Marketing Costs:** Auditing involves judging the authenticity and legality of specific cost applications and reimbursements, sometimes hiring market inspectors to supervise the effectiveness and truthfulness of cost usage. Evaluation involves reviewing and analyzing the effectiveness of cost usage, summarizing the input-output relationship of various costs. These two tasks are crucial and are the final handles for implementing cost strategy.

**Extended Reading:**
Hai You: Special contributor to New Distribution, senior researcher, offline channel marketing practitioner, and designer of enterprise channel coverage models. He has provided channel consulting for over ten first-tier brands, earning a good reputation.


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