So, you want to know how a freight brokerage makes money.
The answer to this question can sometimes seem like it’s simply not for you to know.
Like it’s concealed in a veil of secrecy which leaves you feeling intimidated, confused and reluctant to work with one.
To make matters worse, two aspects of freight brokerages just don’t seem to add up:
- You know that freight brokers don’t own any trucks, trailers or physical trucking assets of any kind. Additionally, you understand that brokers don’t employ their own drivers or possess a “truck in hand” for their customers.
- You know that the right brokerage — like any great partner — can have a substantial impact on the health of their customer’s supply chain and — in many instances — save them money.
But how can a third-party company — a company that doesn’t physically control any of the raw assets needed to accomplish a task — have so much control over that task’s successful outcome?
Beyond this, how can these third parties save you money while at the same time turning a profit?
Here at ATS Logistics, we’ve been in the freight brokerage business since 1989.
If you do the math, you’ll find that as soon as the ball dropped — signifying the start of 2021 — we entered our 32nd year of operation.
Along with wrinkles, back pain and grey hairs, time also brings nice things like wisdom and… compound interest.
As such, our investments, and our knowledge, are decades stronger than the majority of this nation’s 17,000 freight brokers and we’re here to answer your questions.
This is especially true when you’ve got questions about your money and no one else will answer them for you.
In this article, we’ll break down:
- How a freight brokerage makes money
- How a freight brokerage earns the money they make
- How a freight brokerage saves you money while remaining profitable
- How you can select a good brokerage the first time
Don’t be surprised if, at the end of this blog, you’re far more comfortable spending your shipping dollars with the right brokerage instead of working directly with a carrier.
The partnership you’ll gain, the confidence you’ll acquire and the peace of mind you’ll foster may seem too good to pass up.
Let’s get to it. . .
How Does a Freight Brokerage Make Money?
Freight brokers make their money in the margin between the amount they charge each shipper (their customer) and what they pay the carrier (the truck driver) for every shipment. Although it varies from one transaction to the next, healthy freight brokers typically claim a net margin of 3-8 percent on each load.
Honestly, though, the answer to this question isn't as simple as a single equation or phrase. . .
To truly understand how a freight brokerage makes money, we’ll have to take a sudden step into the world of financial accounting.
In the interest of simplicity — and operating under the assumption that you don’t possess a CPA — here are the three (pretty general) metrics freight brokers use to measure profit:
- Gross Revenue
- Gross Margin
- Net Margin
Concerning freight brokerage, these terms are defined as follows:
1. Gross Revenue
Gross revenue is the total amount of money that a company makes from selling its products/services without subtracting expenses.
What does gross revenue mean for freight brokerage?
In the case of freight brokerage, gross revenue equals the sum amount they’re paid to move customer’s freight throughout a calendar year.
If a brokerage has done 30 transactions with an average cost of $835 (prices are variable from one transaction to the next) their gross revenue for that year would be $25,050. (30 x $835 = 25,050)
2. Gross Margin
This is the amount of overall dollars remaining from revenue-generating activities after subtracting the cost for the creation/acquisition of the product/service offered.
What does gross margin mean for freight brokerage?
Gross margin numbers are often displayed as a percentage of net sales and for a freight brokerage, usually range from 10% - 20%. This means that for every $1 you pay your brokerage, they usually take away less than $.15 in gross margin.
3. Net Margin
Net margin is a great indicator for determining the health of any business, freight brokers included.
Net margin is displayed as a percentage, calculated by taking net income (revenue, cost of goods (services) sold, operating expenses, interest, taxes) divided by net revenue, multiplied by 100.
What does net margin mean for freight brokerage?
For brokers, net margin is an important tool in determining the overall success of their business strategy. Providing a third-party service —where the customer’s needs come first — isn’t always lucrative.
Net margin provides freight brokerages a way to measure their overall financial performance and make adjustments accordingly.
In general, healthy freight brokers operate with a net margin ranging anywhere from 3%-8%.
As shown above, brokers measure their financial success, and keep the lights on, using the same key performance indicators that you do.
These brokers make money by providing their service at the highest possible level and saving their customers money. This, in turn, gives brokers the wiggle room needed to remain profitable.
Related Content: The Ultimate Guide to Freight Brokerage (Everything You Need to Know About Working With a Freight Broker
How Does a Freight Brokerage Earn The Money They Make?
At this point, you’re probably saying to yourself:
“Ok sure, all of those definitions are helpful. . . but how does a freight broker actually MAKE money? Wouldn’t it be cheaper to go straight to the carrier myself?”
There’s a common misconception in the transportation industry that freight brokerages will bump up the price you pay so they can make more money on your freight.
And, in an industry that has over 17,000 freight brokerages to choose from, some brokers may take advantage of you in this way.
The good ones though — the brokers who become an extension of their customer’s supply chain — never will.
Instead, these brokerages save their customers money, time and heartache by doing three things.
Just like Jimi Hendrix’s hands knew the fretboard of his right-handed guitar — a white Fender Stratocaster that he strung backward. . . lefty-style — a good brokerage knows their craft.
To do this takes countless hours of practice, vigilance and dedication to developing a skill-set that utilizes:
- Trucking market visibility
- The latest and greatest technologies
- Transportation industry expertise
1. Trucking Market Visibility
Just like you’re an expert in your industry, good freight brokers are experts in theirs. This is what they do.
As such, these brokers monitor the ebbs and flows of the transportation market to analyze trends. This helps them understand the capacity restrictions and demand surges happening across the U.S. at any given time.
In turn, this enhanced visibility helps to secure capacity for customers in their immediate area and when they need it.
Because they have visibility of the overall market, brokers can find the right truck for their customer’s freight at the right time and the right price.
How does this save you money?
Carriers love to be efficient with their time. If their wheels aren’t under a shipment, they aren’t making money. Because of this, truckers don’t like to spend a lot of time driving to their next pick-up location without a load behind them.
As such, you’ll end up paying additional money so that a driver is properly motivated to drive the extra distance needed to service your shipment. Additionally, if a driver doesn’t have a load booked — or is worried about finding a load — out of your end-point they may also charge you more.
Drivers want to be under a load and always want to know where their next shipment is coming from.
This is where a broker’s visibility can help.
As soon as you call a good broker for assistance with your shipment, they reference their current network of carriers in your area to find your truck. These are carriers that they know — based on past experience —can get the job done.
Since these carriers are located in your area and have a prior history working with your broker, they trust this partnership and know that — if a situation arises at your freight’s destination — your broker will be able to secure them another load to haul home.
As such, your broker can properly and fairly price your shipment based on what the current pricing in your region, according to your shipment’s specifications, dictates.
Often, this oversight will save you money far and beyond what your brokerage pockets for their assistance.
2. The Latest and Greatest Technologies
Benjamin Franklin once said, “When you’re finished changing, you’re finished.” his quote couldn’t ring truer than it does for freight brokers.
As a general rule, the brokers that adapt and change with the times thrive. The broker’s who don’t, don’t last long.
Because of this, good freight brokerages are constantly updating — and utilizing — the newest automation, load tracking and market analysis technologies to help their customers succeed.
These technologies include, but are not limited to:
- Automated safety systems
- Internet load boards
- Online freight tracking portals
- Internal carrier ranking systems
- Transportation market analysis software
All of these technologies, when used in tandem, help freight brokers put their customer’s needs first. From one shipment to the next, freight brokers use the best technologies available to complete their duties and make money.
Note, if a shipper were to manage all of their freight in-house, the cost of these tools would rest firmly on their shoulders alone. Good brokers give their customers the benefit of these tools without having to bear the cost of using them on their own.
How does this save you money?
Saving money when moving your freight can often come down to the little things like:
Information on when your shipment will arrive to help you plan for these occurrences so that you’re not caught off guard.
Analysis of the overall market so that you don’t pay too little to get the job done or more than you need to.
Booking the correct carrier, with a demonstrated history of transporting freight like yours the first time so that you feel comfortable with your choice.
All of these little things, and others like them, when done incorrectly will increase the price you pay for your freight.
By staying tuned into, and utilizing, the newest and most helpful technologies, good freight brokerages can help you avoid potential issues that would otherwise hurt your budget.
Using technology, your broker will help you avoid:
This saves you money in the long run since your brokerage has your back from start to finish.
3. Transportation Industry Expertise
Some freight brokerages, the best ones, boast decades of company history in the transportation industry. These brokerages know exactly what they’re doing since freight brokers that don’t, exit the industry promptly.
Longevity is earned in this business and brokers who understand the balance between making a profit and saving their customers money tend to succeed.
Their experience translates to a deeper understanding of the transportation industry and how to get the job done correctly, efficiently and cost-effectively the first time.
How does this save you money?
The best brokers put their expertise to work for their customers as they become a seamless extension of their supply chain. These brokerages become not only a transportation provider but an endless resource of knowledge for their customers to rely on and turn to.
As such, silly mishaps like overpaying for a shipment happen infrequently as the broker understands the exact price it’ll take to get the job done.
By leveraging their relationships with carriers and their understanding of the transportation world, brokerages with a history in this industry save their customers money every. single. day.
The Next Step in Picking the Right Broker For You
As you now know, the way a freight brokerage makes money extends well beyond the Xs and Os of other businesses.
To make money as a broker, we need to save our customers money. It’s that simple.
The more money freight brokerages can save their customers by leveraging industry visibility, the latest technologies and transportation expertise, the more successful they are.
But how can you make sure you’re picking the best brokerage for your business? The three best ways to measure this — especially at the surface level — are:
At the end of the day, any freight brokerage that doesn’t serve customers and maintain carrier relationships, before its bottom line, doesn’t thrive.
As such, if you feel like a freight brokerage might be the transportation partner you’re looking for, make sure to do your research.
- How long has this company been around?
- What type of freight have they moved in this time?
- How large is their carrier network?
Your very next step toward mastering your shipping budget is to watch this video on the top 7 things to consider when selecting a freight brokerage so that — when the time comes — you’ll have a better grasp on exactly how to choose your broker.
If you’d like to talk more about how ATS Logistics can help you reach your goals and save you money on your next shipment, we’d love to discuss this with you.