How do freight brokers make money? There are a lot of different ways to generate income as a freight broker. There are also a lot of different approaches and strategies, and each has its pros and cons. In this blog we'll be answering the most important question of all, how do freight brokers actually get paid?
There are many different ways that a company can be structured to broker freight. You could be a W2 employee of a licensed freight brokerage, you could be a freight agent, or you might be the licensed freight brokerage with only yourself as an employee. The structure of the company will determine your responsibilities within it. It will also play a big part in what you'll actually earn in commission for the same reason. As a rule of thumb, the more tasks and roles you're responsible for, the higher your commission percentage typically is.
What all of these structures have in common is that they all make money the same way. In its most basic sense, a freight broker is just an intermediary between a trucking company and a shipper. A trucking company may be made up of dozens of drivers, it may also be one driver that functions as an owner operator. The shipper may be your customer, or it may not be. Sometimes the company actually loading the truck, isn't the one that tendered the freight. Tendering freight is just industry lingo for sending a load to another person or party. For our example today, let's assume they're the same.
Now, what is your customer really paying you for as a freight broker? First, the obvious answer is that they are paying you for the truck that actually picks up their load and delivers it to the specified location over a specified time period. The second thing they are paying you for is the time and effort it took to secure that truck in the first place. And the third thing they are paying you for is the service of tracking and tracing that shipment from it's pickup to its destination. Finally, the last thing they are paying for is open and honest communication of those updates in a timely manner.
Now let's review a simple example that shows how a freight broker makes money on a shipment. Acme supply needs a shipment of widgets hauled from Miami, FL to Chicago, IL. It needs to be picked up on Monday and delivered by Thursday. Acme is willing to pay $2,500 for this shipment to be completed. This is also called your gross revenue, accounts receivable, or AR.
The second part of the example is the carrier. Let's say you've searched through DAT's RateView and determined that you can expect to pay a carrier somewhere in the range of $1,499 to $3,211. The difference between this carrier pay and your customer’s revenue is your profit as a freight broker, often called gross profit or GP.
What is the first thing you've noticed? It should be that there will be some carriers that will cost you more than your shipper is willing to pay, and some that are less. In our example, the carriers that want to be paid $3,200 will be more expensive than your customer is willing to pay, the original $2,500, so we won’t be using them.
The point I want to make sure I’m getting across is that this will almost always be the case. Not every driver or trucker is the right fit for every load. Some are and some aren't. This is what you're being paid for as a freight broker: the actual work of finding available trucks and their cost to determine if that carrier is the right fit. The amount of money you will earn on this specific shipment will be based on how well you perform this task. The better you are at negotiating a carrier at a lower rate, the more money is left for you. The higher you have to pay, the less profit you earn. It's really that simple. Gross profit is the money you'll make as a freight broker, the amount you charge a customer minus the amount you pay the carrier to haul the load..
Customer Revenue - Carrier Pay = Freight Broker Profit
A final word of caution: simple does not mean easy. It takes time to understand why one carrier may be asking for more than another carrier, and you'll need to practice negotiating just like anything else you want to get better at.