Unlike many sales jobs, freight brokers are normally paid based on the gross margin of loads, rather than the gross revenue number. The reason for this is that gross revenue is not the key metric for a brokerage in any industry. The most important metric is the profitability of each individual buy and sell transaction.
Gross margin vs. gross revenue – Gross revenue is what a freight broker charges customers, which are normally called shippers. The gross margin is the difference between what a freight broker charges a customer (GR minus the cost of purchased transportation, or the amount a freight broker pays a carrier to move the load).
Gross Margin = price charged to shipper – price paid to a carrier
The difference between the customer price and cost of purchased transportation measures the true profitability of each transaction.
This is an important distinction for a freight brokerage in much the same way it is an important distinction for an individual freight broker’s commission. Gross revenues can be a deceptive metric for a freight brokerage. Unlike most industries that have relatively stable costs for manufacturing or providing services, the cost of purchasing transportation from carriers is highly variable. This can be illustrated by comparing the following two loads:
$5,000 charged to customer – $4,500 paid to the carrier = $500 gross margin or net revenue
$2,000 charged to customer – $1,500 paid to the carrier = $500 gross margin or net revenue
In the example above the $5,000 load will represent 250% more in gross revenue, but at the end of the day both loads bring in the same amount of gross margin.
Net revenue – is another term used to describe gross margin. Net revenue is usually used in accounting and finance to differentiate between the gross revenue collected from customers and the revenue left over after the freight brokerage pays a carrier to move the load.
Unlike industries that produce tangible products and have a stable cost structure for production, freight brokerages’ cost of purchased transportation is volatile and variable. Freight brokerages operate like financial brokerages that buy and sell varying assets on a daily basis and only charge a commission for their services.
One prime example of a brokerage model is eBay. While there might be billions of dollars bought and sold each year on this platform, the company only really earns its commission on each transaction. So, only the commissions eBay earns – its net revenue – is available to pay technology, marketing, administrative and payroll costs. Of course, what is left over is the company’s profits.
Commission for freight brokers – So, whether a freight broker sells $50,000 or $500,000 of freight to customers is immaterial to the commission. How do freight brokers get paid? The only metric that really matters is the profitability of each of those transactions or loads, which is described as the gross margin or net revenue.
Compensation and commission plans vary from one freight brokerage to another, so there is no one universal commission plan. Some freight brokers earn a base salary plus commissions and others are paid on commission only. According to FreightWaves 2019 freight brokerage compensation survey, the median entry-level salary for a freight broker is $40,000 per year with an average commission of 13% to 15% of gross margin on loads.
Source: FreightWaves 2019 freight broker compensation survey.
So, an entry-level freight broker selling on average $20,000 per month in gross margin would expect to earn $71,200 per year with a 13% commission.
You can find more information on freight brokerage sales on the popular FreightWaves sales show, Put That Coffee Down.
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