Wholesale vs. retail
In reality, the majority of micro- and small carrier freight is ‘wholesale freight,’ meaning brokered freight. Is this a good way to do business?
While the objective of any carrier, regardless of size, is to haul loads at the highest rate possible, there are multiple variables when determining the highest rate possible. Who has the freight? Direct shipper, 3PL, freight broker or another trucking company?
You would receive a retail hauling rate from the direct shipper; wholesale rates from the other three.
Location and type of freight determine freight rates. Those market forces will decide supply vs. demand of trucks available to haul freight. 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 person setting up the load, otherwise known as 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, which can be anywhere from 5% to 30%—or even higher.
So, is it a bad business practice to haul wholesale freight? That depends. How does the overall rate compare to your hauling rate range? Your hauling rate range is the difference between your lowest and highest hauling rates. This range covers the break-even point of your operation (and each truck) at the low end and the capitalization figure needed to move you towards financial sustainability and growth. All fixed costs such as the owner’s salary, operational and fuel costs, and all load-specific costs are included.
Combine the payment on this load with the revenue generated from loads on other legs produced within the truck’s freight lanes. When this is compared to the cost of running all the legs, is there profit?
Your best scenario would be to haul all retail rate loads, but in the real world that’s very difficult to do because you’d need a freight salesperson at each destination location to get your loads out. And 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 who’ll work with you and who knows your revenue needs. Remember, however, that the broker also needs to cover his/her costs and make a profit as well. You’ll be receiving a wholesale rate, but setting up an office would be far more costly than the lower rate.
The more carefully you plan and organize freight lanes for each truck, the more you’ll work with the same shippers, brokers and receivers week in and week out. This means your revenue will be more consistent—and so will your profit.
Contact Tim Brady at 731-749-8567 or at www.timothybrady.com
