Are You Hauling Retail or Wholesale Freight?
What kind of question is this, you might wonder. Most small and micro-carriers would insist they only haul ‘retail freight,’ meaning they’re paid the retail full hauling rate for the freight they haul. In reality, all or the majority of most micro- and small carriers’ freight is ‘wholesale freight,’ meaning they’re hauling brokered freight. Is this a good or a bad way to do business? Well, let’s examine this from a revenue/cost perspective.
While the objective of any carrier, regardless of size, is to haul loads at the highest rate possible, multiple variables go into determining that “highest rate possible.”
1. Location, Location, Location: one of the biggest deciding factors in what rate is paid for a particular load. The quality of a location is determined by the truck-to-load ratio, or how many loads are available for what number of trucks in an area. More loads, fewer trucks, the higher the line haul; fewer loads, more trucks, the lower the hauling revenue—simple supply and demand.
2. Type of freight: This is dependant on what’s manufactured in the location or what’s stored and then distributed. Is it lumber mills, or refrigerated food storage and distribution, steel coils, toilet paper or bottled water? Each one of these commodities requires a different type of truck to haul it. Therefore, it depends on whether you came into an area with a flatbed load of pallets for a cold storage facility that ships out frozen food. In this case, the flatbed trucker would face a high truck-to-load ratio for outbound freight, while a refrigerated trucker might see a high load-to-truck ratio.
3 Who has the freight? Direct Shipper, 3PL, freight broker or another trucking company? Direct Shipper is the one you’d receive a retail hauling rate from; the other three are wholesale rates. To explain: when you haul through a freight broker, 3PL or other trucking company, there’s a commission for arranging the load. Mostly location and type of freight, as listed above, establish freight rates. Those market forces will decide supply verses demand of trucks available to haul what freight’s available. That becomes your retail-hauling rate. When a broker, 3PL or other carrier arranges for the freight to be hauled, they’re the ones with a direct relationship with the person or company paying the freight bill, the shipper. Whoever sets up the load, called the freight arranger, charges a commission for facilitating the movement of the load. The difference between the retail rate and the wholesale rate is the freight arranger’s commission.
So is it a bad business practice to haul wholesale freight? That depends on several factors.
1. How does the overall rate compare to your hauling rate range? Your hauling rate range is the spread of revenue between your operation and your truck’s Break-even Points and your top hauling rate that includes your profit margin. Note: Break-even Point encompasses all fixed costs, including the carrier owner’s salary, operational and fuel costs along with all load-specific costs. Profit margin includes the capitalization figure that moves you towards financial sustainability and growth.
2. When the payment on this load is added to the revenue generated from loads other legs produced within your truck’s freight lanes, versus the cost of running all the legs including this one, is there profit? In other words, because of a low load-to-truck ratio coming from a single leg of the entire freight lane, when all revenue and costs are calculated for the entire run, is there excess money (profit) beyond expenses?
Your best scenario would be to haul all retail rate loads, but in the real world that’s very difficult to accomplish because you’d need a freight salesperson at each destination location to get you loads out. The problem, it’s usually cost-prohibitive for the micro- or small carrier to maintain a sales office and personnel in each destination location. The solution is to find a broker that will work with you, who knows your revenue needs. Realize the broker also needs to cover his/her costs and make a profit. Yes, you’ll be receiving a wholesale rate, but setting up an office would be far more costly than the lower rate.
Last thought: the more carefully planned and organized freight lanes are for each truck, the more you’ll work with the same shippers, brokers and receivers week in and week out; and this means your revenue will be more consistent – and so will your profit.
Drive Long and Prosper.