3 Reasons Freight Brokers Should be Pricing with Margins, not Markups
The most common mistake made by freight brokers is to use markups for pricing loads with customers and carriers. This practice leaves money on the negotiating table. Pricing instead with margins will make it possible for freight brokers to add more to the bottom line of every transaction as well as:
- Win more freight opportunities
- More accurately forecast profits
- Scale and grow the business
Why pricing with markups isn't always the smartest
Markups are simple to use when brokers are asked for a quote. All they need to do is add a fixed amount to the cost of the load based on what experience and historical lane data says the cost will be.
This practice is generally used for short-haul or less-than-truckload shipments with a low risk of surprises, fast transit times, easy coverage, and predictable costs. But the downfall is you'll always be leaving money on the table.
Before getting into any examples, here's how you calculate markup percentages vs margin percentages:
- Markup percentage = markup / cost of the load.
- Margin percentage = (total quote - the cost of the load) / total quote
The difference between pricing with markups vs margins:
If a customer asks for a quote for Houston to San Antonio, a broker may know that the cost will be about $500. The broker could simply add a 25% markup ($125) and return a quote to the customer for $625. Even though the markup seems high, the margin is only 20%. If the broker approached carriers with a buy cost of $469 instead of $500, that would be a 25% margin and an increase of $31 per load.
By using a markup instead of a margin to negotiate with carriers, the broker will 5% profit on the table.
For a longer-length shipment from Houston to Birmingham, the broker’s lane data may show the cost will be about $1400. The broker could add a $250 markup (17.8%) and return a quote for $1,650. The broker’s markup percentage is 17.8% but the margin percentage is 15.1%. If the broker had negotiated with a 17.8% margin in mind, they could have added $44 more profit to each load.
In both examples, the broker leaves money on the table by not approaching the negotiation with a margin in mind. This is evident when comparing the markup percentage to margin percentage.
The extra margin per load becomes very significant when multiplied across hundreds of transactions per month.
Besides increasing profits, brokers that use margins as their basis for negotiating with carriers will win more freight opportunities from being able to offer their customers more competitive pricing and protect themselves from being undercut. Margins also make it possible to set realistic forecasts for profits and have additional funds to invest in scaling and growing a business.
When negotiating rates with carriers, the margin goals of a broker determine its max buy rates for loads to make better quoting and buying decisions.
Price future freight with confidence with C4
Cargo Chief's C4 platform offers the most advanced capacity procurement and pricing tool in the market that gives brokers access to over 500,000 carriers. C4 has all of the workflow and reporting tools needed for brokers to optimize carrier relationships and gain confidence in their pricing and buying decisions.
C4 shows the max buy rate for each lane calculated using the broker’s price, its margin goal, and the current market rate for the lane. To get the current market rate, C4 has an exclusive real-time rate database updated continually through a data-sharing consortium of leading TMS providers' loads booked by thousands of small and medium-sized brokers.
The practical, current, and unique data of C4 is helping brokers make superior buying and selling decisions and grow their businesses. For more information, schedule a demo to see C4 in action.
Watch our recorded webinar about why freight brokers should be pricing with margins vs markups:
