In the FMCG industry, 'expenses' are both the 'ammunition' for brands to drive the market and the 'lifeblood' for distributors to survive. But the problem today is that the market environment has changed: there are more channels, output per channel is declining, and consumer demands are more diverse. This makes the traditional one-size-fits-all expense model increasingly unable to adapt to the market. Currently, common expense models in the FMCG industry can be broadly divided into five categories: budget-based, cash fund-based, full product-value coverage, half cash-value coverage, and full cash-value coverage. Today, we will deeply analyze the pros and cons of these five models, combine frontline case studies to highlight the core pain points between brands and distributors in expense allocation, and provide a set of best-practice methodologies for 'layered matching and dynamic balance'. The essence of expense models is a trade-off between 'control and flexibility' In the FMCG industry, the expense allocation from brands to distributors is commonly categorized into five types (naming may vary by company, but the core is the same): The first type is the budget-based model: a tight rein, but also a shackle on innovation The main operational logic is that the brand sets annual/quarterly expense budgets, and distributors must submit applications first, which must be approved before use. There is usually a hard threshold such as 'no reimbursement if performance achievement is below 60%'. The advantage is that the manufacturer firmly controls expenses and terminal direction, ensuring strategic resources are invested in key terminals or new product promotions, avoiding expense leakage. But the problems are also obvious. Distributor flexibility is suppressed. The market frontline changes quickly; competitors may increase investment today, terminals may demand resources tomorrow. If all actions require approval, opportunities may be missed. The budget-based model is suitable for scenarios such as new product launch periods, building core model markets, and stages requiring strict price system control. The second type is the cash fund-based model: a flexible fund pool, but also a reservoir of risk The main operational logic is that the brand pre-allocates an 'expense fund' based on the distributor's sales volume (e.g., monthly shipment value × a specific ratio). Distributors can independently choose where to invest (display, merchandising, promotion, etc.), and reimburse based on actual expenses afterward. The advantage is that distributors have a sense of control over market resources, can flexibly allocate based on their own strengths, and have higher control over operating profit. The disadvantage is that expenses can easily become inflated; money may be spent just to use up the budget, leading to resource waste. Additionally, there is a lack of clear ROI (return on investment) assessment, resulting in uneven efficiency. It is suitable for mature markets, distributors with strong operational capabilities, and stages where brands want to stimulate distributor initiative. The third type is full product-value coverage: behind the simplification lies the hidden danger of inventory The main operational logic is to convert all expenses (display, merchandising, promotion, rebates, etc.) into 'product gifts' recorded in the account. Distributors receive physical goods instead of cash and bear their own profits and losses. The advantage is that it greatly frees up business personnel's energy, as manufacturers do not need cumbersome reimbursement processes. If distributors can digest the gifted products, profit margins can be substantial. But it can easily lead to product value backlog, especially in categories or markets with slow sell-through. A large amount of gifted products can occupy distributor capital and warehouse space, eventually becoming 'dead inventory'. It is suitable for strong brands, high-turnover products, and mature channels with smooth sell-through. The fourth type: half cash-value coverage: the art of compromise, but also a blurred boundary The main operational logic is that part of the expenses (such as display, merchandising) are credited in cash based on shipment achievement ratio; another part (such as promotions) still requires application before use and is reimbursed based on actual results. The advantage is that it integrates distributor terminal resources, reduces reimbursement workload compared to the full budget-based model, and improves flexibility. At the same time, fixed rates do not decrease with performance growth, weakening mid-term profitability; and the 'half coverage' boundary is vague, easily causing disputes during execution. It is suitable for channel transition periods and scenarios where some expenses are difficult to fully standardize. The fifth type: full cash-value coverage: ultimate trust, but also the risk of losing control The main operational logic is that all expenses (display, merchandising, promotion, rebates, etc.) are directly allocated to distributors in cash based on shipment achievement ratio, with distributors bearing their own profits and losses. The advantage is that it minimizes business reimbursement workload, and distributor autonomy and initiative reach their peak. But there is a serious risk of 'channel dumping': distributors may sell at low prices across regions to obtain more cash expenses. Additionally, terminal inventory may increase, and sell-through execution may become a formality. It is suitable for highly trusted strategic partners, markets with flat channel management, and regions where distributors have extremely strong operational capabilities and the market is very mature and stable. Summary: Many markets become increasingly painful to invest in not because 'a certain model is wrong', but because it is used on the wrong target, at the wrong stage, or without guardrails, turning 'expenses' into 'price subsidies', 'profit relocation', or 'rent-seeking pools'. Mismatched expense models often do harm with good intentions Let's share three cases. Case 1: A second-tier beverage brand implemented 'full product-value coverage' in a lower-tier market in the north. Due to the long winter and extremely slow sell-through, the distributor's warehouse was piled high with 'special offer' products used to offset expenses. This not only occupied hundreds of thousands of yuan in capital but also caused huge losses due to product expiration. Distributors complained bitterly and even refused to stock, causing the brand's market share in that region to plummet. Pain point: Model mismatch led to 'acclimatization failure', ignoring the seasonal characteristics and terminal sell-through capabilities of lower-tier markets, blindly applying a full-coverage model suitable for mature markets. Case 2: A instant noodle brand, to boost sales, implemented a 'cash fund-based' model for distributors but lacked effective reimbursement review and price monitoring. Distributors found that instead of working hard on displays and promotions, it was easier to treat the fund as 'price reduction space' and push it to terminals. Eventually, online prices fell below ex-factory prices, leaving offline secondary wholesalers with no profit, and the entire price system collapsed. Pain point: Expenses became 'price subsidies', breaking the price system. If the cash fund-based model lacks strong supervision of 'expense usage' and hard constraints like 'minimum list price (MLP)', it can degenerate into 'price war subsidies'. Case 3: A snack brand implemented a 'budget-based' model in core cities. At the beginning of each month, salespeople were busy helping distributors fill out expense applications; mid-month, they checked display compliance; and at month-end, they handled reimbursements. But this 'campaign-style' investment, once encountering off-season or increased competitor investment, quickly cooled market heat, and consumer repurchase rates were extremely low. Pain point: The 'campaign-style' investment under the budget-based model lacks sustainability. The budget-based model overemphasizes 'process control' while neglecting 'consumer mindshare capture' and 'long-term brand asset accumulation', causing expense investment to be like 'throwing money into water'. Summary: The ultimate goal of expense management is 'efficiency symbiosis'. In the FMCG industry, there is no absolutely perfect expense model; only the matching approach that best suits the current market environment and the relationship between both parties. How to match expense models effectively? The core of manufacturer expense allocation is not how much money to give, but 'how to give' in a way that both stimulates distributor vitality and achieves the brand's strategic goals.

  1. Match by channel lifecycle: focus on control in the new expansion period, focus on efficiency in the mature period New expansion/model period (introduction): Use the budget-based model. At this time, the market needs to set benchmarks, and the brand must strictly control expense flow to ensure every penny is invested in core outlets and consumer education, even at the cost of some flexibility. Mature/stable period (harvest): Use the cash fund-based model or full cash-value coverage. At this time, the market foundation is solid, and the brand should give distributors more autonomy to flexibly allocate resources based on local competitive dynamics, improving personnel and expense efficiency.
  2. Match by distributor capability: give strong distributors space, give weak distributors a ladder Strategic major/strong distributors (strong operational capabilities, good reputation): Boldly adopt full cash-value coverage or half coverage. Give them full trust and freedom, establish incentive mechanisms like 'performance betting and excess profit sharing', and turn them into brand partners. Mid-sized distributors (weak operational capabilities, high dependence): Use the budget-based model. Provide clear operation manuals and process guidance to help them 'climb the ladder', while gradually improving their operational capabilities through frequent checks and training, avoiding misuse of expenses due to lack of capability. Small/micro or weak distributors: Use product-value coverage to focus resources and manpower on value-added distributors.
  3. Match by market characteristics: differentiated allocation to avoid one-size-fits-all Modern channels (KA, convenience stores): Suitable for the budget-based model. KA systems have complex processes, requiring unified negotiation and management by the brand. Expense allocation must be closely linked to shelf position, facing count, and promotional activities. Traditional circulation (secondary wholesalers, mom-and-pop stores): Suitable for the cash fund-based model. Secondary wholesalers value cash flexibility and profit margins; giving them some expense autonomy can effectively mobilize their distribution enthusiasm. Special channels/group buying/catering: Suitable for full product-value coverage or half cash-value coverage. These channels often have specific price systems or settlement methods; using product gifts or a combination of partial cash is easier to implement.

Final Thoughts

When designing expense systems, brands should not only think about keeping accounts clear or simply motivating distributors. First, what is my current market goal? Is it new product introduction or improving sell-through? Is it stabilizing prices or grabbing share? Different goals require different expense models. Second, do distributors have the capability to use expenses well? Not all distributors can use expenses to build the market. Some distributors are suitable for delegation, while others need standards, actions, and checks. Third, can the market and channels absorb this expense? If terminal sell-through is weak, product-value coverage may become inventory pressure; if the price system is unstable, cash funds may become low-price subsidies; if approval is too slow, the budget-based model may miss market opportunities. Expenses are not necessarily better when more or more flexible. The best expense model is one that allows distributors to make money, brands to grow, and consumers to be satisfied.