Is Freight Broker Pay Justified?
In our last blog post, I said I could write an entire post on the mechanism of freight broker pay. Here’s the lovechild of that claim. Freight broker pay and topics surrounding it are very sensitive and complex issues in the transportation industry. In fact, as I was writing I felt as though this medium was insufficient to capture the complexities of the freight broker pay mechanism. My ideas here are not novel or groundbreaking, nor are they absolute. However, I’ve not found this topic addressed in any detail. Here I will discuss briefly why brokers (to a certain point) are worth the money they make and why customers and carriers may distrust brokers. Finally I mention how we might create harmony between the three parties involved in the process so that all enjoy a mutual benefit.
Yes, to an Extent
The first issue on this topic is whether the freight broker is worth the money it makes. I argue that they most certainly are up to a certain point, and not beyond that, but only if the work done by the freight broker provides a benefit to the carrier and customer over and above the fee the broker charges.
What Brokers (should) Do
The first thing a broker must do is take some responsibility off the hands of logistics coordinators of the customer. A freight broker does this well if she has access to trucking companies through industry software and experience that the shipper otherwise would not have. That carrier network expands exponentially if the customer utilizes 2-3 brokers with which the business realizes a long-term relationship whereby each party feels invested and involved in the other’s success.
A freight broker also proves her worth if she assumes responsibilities that the customer organization would otherwise be handling, i.e. booking appointments, liaising between shipper and consignee, matching multiple drops, negotiating annual rates, etc. A company would add a position internally to handle these tasks and pay an hourly wage or salary. This translates to more overhead, more taxes, increased fixed expenses.
How to Quantify Broker Pay
A rough estimate for an average salary for a logistics coordinator is around $45,000 per year. For a logistics supervisor, it hovers around $60,000 per year. One good freight broker with whom you realize a long-term oriented, mutually beneficial relationship, performing similar duties could potentially eliminate an entire position. This saves the company anywhere from $40,000-$80,000 per year.
Broker and Carrier Mutual Benefit
Further, a broker must provide business to a carrier that in absence of the broker the carrier would otherwise not have. As freight brokers, we specialize in matching carriers with our customers’ loads. We realize a degree of specialization either on a certain lane, with a particular type of freight or in a region of the country. We find carriers with which we repeat business, develop relationships and earn trust, the results of which enable the broker to rely on the carrier and vice versa. At this point we essentially become a part of each other’s business – the carrier becomes a de facto “fleet” of the broker and thus, of the shipper customer; and the broker becomes a de facto “outside sales” entity operating on behalf of the carrier. The relationship at that point is firmly rooted in the performance of one another at all three points of the triangle.
The Margin/Markup Issue
We’ve examined the benefit that a good broker should provide, but I did say “up to a certain point, and not beyond that[…]” Customers and carriers aren’t stupid. Both know when a broker quotes the customer there is profit baked into the rate, but neither party knows what it is. Why? Well, if you deal with brokers, have you ever asked them? Have you asked what their standard markup is? The answers to those questions are why there is rampant mistrust toward brokers from customers and carriers.
The shipper in most situations does not know how much they are paying to access that carrier through the broker and the carrier does not know how much more expensive their rate is going to be when it gets to the ultimate determiner of whether they get the load. The lack of transparency leaves one to either guess or simply not question it – this creates resentment.
The scenario of a broker posting a load on a load board, negotiating the rate with a carrier, marking up freight and submitting a bid to a customer who chooses among many broker bids, is a generalization. Not all freight brokers book freight in this manner. However, many do and it helps to illustrate this point. If a customer was to find out that on a rate of $1,000 from the freight broker, she was paying $150, representing a 15% margin, it would not likely stir the pot.
But what if the quote includes $400 profit? What if the broker bids the load at $10,000 with a 40% margin? In this scenario, the broker short-changes the carrier, the customer pays far more than is reasonable to access that carrier, and far more to have the broker perform the same ancillary services they would provide at a 20% margin, generally speaking. Over time, the latter scenario is not sustainable and eventually, one point of this triangle will be removed and replaced. When profit margins become exorbitant and unjustified the broker may benefit in the short term, but, over time the customer’s costs become inflated and the carrier gets taken advantage of.
Conclusion – How to Address Freight Broker Pay Issues
So, what then must I, as the freight broker do to ensure a harmonious interaction in this industry? I must make sure that I am profiting fairly, compensating my carriers fairly, and operating with long-term mutual benefit as my end-goal. I should have an open conversation with carriers and customers and not be tight-lipped about my margins if I am asked. If I want to earn more for my business, I must be responsible financially and work to earn more customers, not to earn more profits on my existing customers by chopping carrier rates. I must be transparent and communicative with both my customer and my carrier. And finally, I cannot allow a pursuit of high margins to cloud my judgment.
I will defend the position that good brokers provide value, but I understand that many brokers do not do it the right way and as such are creating a bad name for the rest who are.
The values of this business need to change. If we fail to do so, we put at risk the perceived utility of freight brokers in this industry. Freight Brokers: have you noticed how prospecting is not as fruit-bearing as it once was? Have you ever wondered why? The backlash toward brokers is due to a deeply ingrained, systematic flaw in the brokerage industry whereby the broker acts upon a goal of high margins for every load and protects their margins at every turn. This short-sightedness will do nothing but lead to more customers and carriers fleeing traditional brokers or figuring out a way around them.
As someone who deeply cares about, and sees the importance of the role of the broker in the transportation industry I don’t want to see this happen. To freight brokers: let’s preserve the value we have earned rightfully as intermediaries and re-establish the long-term outlook as taking precedence over the short-term.
Cheers and happy freighting!