On its face, the way freight brokerages make money can be confusing.
Freight brokerages don't own any trucks or trailers, nor do they employ drivers or possess a “truck in hand” for their customers. Yet you'll often hear that freight brokerages can have a significant impact on the health of supply chains and save shippers money.
But how can a third-party company have so much influence on a process they don't directly control? How can they turn a profit and save you money?
It's time to demystify freight brokers. Anderson Trucking Service (ATS), we’ve been in the freight brokerage business through our subsidiary ATS Logistics since 1989.
After 30+ years of experience, we consider ourselves experts on all things freight brokering, and we're happy to pull back the curtain on the brokerage business model.
Don’t be surprised if, at the end of this blog, you’re far more comfortable spending your shipping dollars with the right brokerage. Let's dive in!
How Does a Freight Brokerage Make Money?
Freight brokers make their money in the margin between the amount they charge each shipper and what they pay the carrier 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.
However, a more complete answer to this question is a bit more complex. To truly understand how a freight brokerage makes money, we’ll have to take a step into the world of financial accounting.
In the interest of simplicity, here are the three high-level metrics freight brokers use to measure profit:
- Gross Revenue
- Gross Margin
- Net Margin
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.
For example:
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)
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.
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 Freight Brokerages Save Shippers Money
There’s a common misconception that freight brokerages will bump up the price you pay so they can make more money on your freight.
And, in an industry with over 17,000 freight brokerages to choose from, it's true that some brokers may take advantage of you in this way. But the good ones earn their profit by knowing their craft inside and out.
That includes knowing which insights and tools to leverage. For the purposes of this explanation, we're going to talk about three of the most impactful:
- Trucking market visibility
- Technology
- Industry expertise
Cultivating this expertise then allows them to optimize shipments on their customers' behalf, saving them money in the process.
Trucking Market Visibility
Good 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.
Imagine you call a trusted broker in your network to get coverage on a load. They'll reference their current network of carriers in your area to find your truck.
Since these are carriers that have a prior history with your broker, they feel confident in the broker's ability to secure them another load after they deliver your shipment.
This tends to make the carrier more likely to want to haul your shipment — and more likely to accept a competitive rate.
Your broker can then fairly price your shipment based on what the current pricing in your region and your shipment's specifications.
Often, this oversight will save you money beyond what your brokerage pockets for their assistance.
Technology
Benjamin Franklin once said, “When you’re finished changing, you’re finished.” This 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 brokers who don’t? They don't tend to last very long.
That's why good freight brokerages constantly update their technology to utilize the newest innovations. These technologies include, but are not limited to:
- Automated safety systems
- Digital load boards
- Freight tracking portals
- Internal carrier ranking systems
- Transportation market analysis software
All of these technologies 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.
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.
Saving money when moving your freight can often come down to the little things, like:
- Choosing an experienced carrier that will minimize the risk of delays or damage
- On-time pick-up and delivery to ensure the most efficient flow of goods
- Up-to-date market analysis to inform accurate, optimized pricing
Each of these elements (and many others like them) are made possible by leveraging the newest and most helpful technologies. Good freight brokerages use their access to this tech to help shippers avoid potential issues that would otherwise hurt their budget, like:
- Scheduling mishaps and delays
- Communication errors
- Common accessorial charges
- Over-priced shipments
When your brokerage proactively invests in industry-specific technology, they can better protect your business's best interests from start to finish.
Industry Expertise
In the transportation industry, longevity is never a guarantee. The brokerages that have stood the test of time have weathered good markets and bad by cultivating industry expertise that is as deep as it is wide.
What does that look like? Imagine a provider that started its life as a small brokerage serving a modest geographic area. Serving a small group of customers, it eventually learns everything there is to know about successfully hauling their freight.
Over time, the strong relationships it has built with the quality carriers in its network leads to good word-of-mouth among shippers. It begins to grow its customer base, which requires it to learn about different freight types and customer needs.
At the same time, it expands its service area and network, making strategic investments in its own infrastructure along the way.
After a few decades of this slow but steady growth, we end up with a well-rounded brokerage that has a deep understanding of the transportation industry as a whole, as well as the specific challenges and nuances of specific freight or shipment types.
These brokerages have put in the time and dedication to develop keen market understanding, solid relationships, and true industry expertise. They're more than transportation providers — they're priceless resources their customers can turn to for expert insights and guidance.
When a broker has significant industry expertise, they'll know the proper cost of a shipment with your specs on your lane. They'll know what type of equipment to recommend to keep your costs minimal. They'll know what the common pitfalls are, and how to avoid them.
In short, the more your broker knows, the more they can do for you. By leveraging their relationships with carriers and their understanding of the transportation world, brokerages with a history in this industry save their customers money through sheer expertise.
Choosing the Right Broker For You
As you now know, the freight brokerage business model is predicated on more than 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, the more successful they are.
But how can you make sure you’re picking the best brokerage for your business? We recommend looking at longevity in the industry first.
Ultimately, brokerages that prioritize their bottom line instead of their customers' satisfaction (or their carrier relationships) don't thrive.
So, as you're vetting freight brokers, make sure to do your research. Look into:
- How long the company has been in the industry
- The types of freight it has moved
- The size and quality of its carrier network
- What it considers to be its core areas of expertise
Want even more criteria to consider as you start vetting? Check out this video on the top 7 things to consider when selecting a freight brokerage.
