Will freight brokerage pricing evolve toward a discounted, transparent fee model like stock brokerage pricing?
To answer that question, let’s examine some of the similarities between the two industries.
The Evolution from Full-Service to Discount Stock Brokers
Back in the 70’s and 80’s full-service stock brokerages dominated the industry. The industry leaders, like Merrill Lynch, E.F Hutton, etc. were household names and even though most people didn’t invest through stock brokers, we all knew who they were.
Being a stock broker seemed liked a pretty good gig – prestigious, clubby atmosphere, nice big office, great pay, expensive suits and a bottle a scotch in the bottom drawer to celebrate all the money being made.
At the time, if you wanted to buy an individual stock, you bought it through a broker. Wealthy investors used stock brokers because the brokerage transaction fees didn’t dent large portfolios. If you were a small investor like yours truly, you bought the far less glamorous mutual fund which had lower transaction costs.
Stock brokers couldn’t lose because they had the following:
- Operational infrastructure, technology and licenses required to buy and sell stocks
- Connections with exchanges, public companies, investment banks, etc.
- Relationships with investors who wanted to buy and sell stocks
- Stock research that was not readily available to investors
- Expertise and experience that enabled them to provide service and advice to investors
- Regulated pricing which meant they didn’t have to worry about disruptive competition
First, Deregulation, and then Schwab Happened…
In 1975, the SEC deregulated brokerage commissions, which enabled stock brokerages to negotiate brokerage fees. Many thought the deregulation wouldn’t have much effect on the market, but they couldn’t be more wrong.
Seizing on the opportunity brought about by the deregulation, Charles Schwab Company launched a discount brokerage offering that drastically reduced the cost of trading stocks. The full-service stock brokers developed less expensive offerings, but their cultures and cost structures made it hard to compete on price. New competitors entered the market and with the emergence of the internet, tech-centric players further reduced brokerage costs and made trading easy and accessible to the masses.
Full-service brokers still exist, but the biggest players in the space are discounters who offer an inexpensive, do-it-yourself service, typically executed online.
According to the Motley Fool, full-service brokers charge approximately $150 per trade and discounters charge between $5 and $20 per trade.
Could the Discount Pricing Model Work in Freight Brokerage?
The stock brokerage business and the freight brokerage business are clearly different, but they also have enough characteristics in common, that we can compare them.
Just like the full-service stock broker, today’s freight brokers enjoy some definite advantages including:
- Operational infrastructure, technology and licenses required to broker freight
- Connections with carriers who have available capacity (especially important in this market)
- Relationships with shippers who need trucks (desperately need trucks in this market)
- Pricing and industry research that is not readily available to shippers
- Expertise and experience that enables them to provide service and advice to both carriers and shippers
Since the passing of Motor Carrier Act of 1980, there has been fierce competition in the freight brokerage industry, however there doesn’t seem to be a disruptive business model in the manner of Schwab. In general, the competition all use similar business and pricing models.
Average Load Price and Freight Brokerage Margin
Assuming the average load is $1400 and the average margin is 14%, the freight brokerage margin is $196. For my purposes, I don’t care if the freight brokerage fee is $150 or $250 – it is eerily close to the $150 fee charged by full-service stock brokers and a long way from the $5-$20 charged by the discount stock brokers.
Could full-service freight brokers be facing the same fate as full-service stock brokers?
What Would Need to Happen for the Discounters to Win?
Most likely, the discount freight broker model would be lead by one or more of the industry leaders because they have the industry knowledge, marketing clout, and existing customer base.
Perhaps, most importantly, the industry leaders have the money required to invest in technologies that will do the following:
- Create online platforms that will match shippers to carriers
- Lower the cost of the brokerage transaction, which will enable them to be profitable while passing on savings to shippers
- Develop an easy-to-use solution that will entice shippers to switch from their full-service broker
- Build a platform and business model that will enable carriers to make more money either through profit margin per shipment or fewer empty miles
Systems like TMS, WMS, and ERP have helped make brokerage transactions more effective and more efficient. Further productivity gain from innovative technologies like blockchain, artificial intelligence, and internet of things could automate some functions like tendering trucks, tracking, tracing and bill payment. If many freight brokerage functions become automated, the transaction price will surely drop over time.
Shippers and Carriers Must be Won Over
If the industry moves to a discounted model, shippers and carriers will be the key. To win them over to a new model there will have to be clear advantages over the current model.
Shippers want great service, easy access to shipping documents, tracking, tracing and a fair price. While many shippers value the relationships they have with their freight brokers, I think many will trade in their full-service broker for a discounted price, especially if the pricing is completely transparent. Remember, full-service stock brokers thought their relationships with investors were more important than a discounted fee.
Carriers, especially those without a big sales team, benefit from their relationships with freight brokers. Freight brokers bring them revenue, good shippers and valuable market intelligence. Brokers also troubleshoot, manage difficult customers and help carriers with network utilization. Yet, all my carrier friends want direct shipper freight. I think many carriers would jump to a new platform or business model if it provided higher profit margins, direct shipper freight and or helped them keep their trucks fully utilized.
The Move to Discount
I think the freight brokerage industry has already begun moving to a discounted, transparent model. The consolidation of the industry along with technology advancements will quicken the transition from full-service to discount broker.
Initially, I was reluctant to write this article because comparing two industries requires more research than this simple logistics blogger was willing to do. Also, I was concerned I was making the error of false equivalence. I ultimately decided to write this article because I wanted to begin the conversation and hear some other opinions on the topic.