3 Types of Freight Transportation Companies

Written by Neal Willis
     

GettyImages-521403525.jpgWhile there can be many different combinations of each, there are three main types of freight transportation companies and business models within the freight industry:

  1. Broker
  2. Gainshare
  3. Fee-for-Service/Commission Model.

 

BROKER

Probably the most common business model of freight transportation companies is the broker model. Freight transportation companies operating under the broker model purchase freight from carriers, put a markup on it, and then resell it to their clients (shippers). With the broker model, re-sell rates can be adjusted on virtually every shipment as needed to protect the business interests of the freight transportation companies. Shippers often don’t have open access to carrier information direct from the carriers themselves because access to the information would expose the profit margins of the freight transportation companies.

The broker model allows freight transportation companies to serve shippers in a very transactional role that gives both the shippers and the freight transportation companies the flexibility to use different carriers at any time. For this reason, freight transportation companies operating as brokers sometimes require clients to sign contracts, which may include minimum volume requirements and/or lengths of time.

The broker model of freight transportation companies can provide a carrier solution for most any type of freight shipment and offers a broad selection of carrier choices with rates that are frequently competitive since multiple freight carriers vie for shipments through bidding on the freight with the lowest rate they’ll accept for each specific move. Depending on the broker, they can offer a wide variety of software and technology solutions ranging from routing and rating tools all the way to complete technology integrations.

A downside is that broad carrier usage doesn’t facilitate any long-term relationships between shippers and carriers nor potentially optimize best shipping practices if their sole purpose is to pick up and deliver freight. Freight carriers that don’t handle the business regularly don’t become thoroughly familiar with shippers and their freight like carriers often do under the gainsharing and commission models. With constant bidding for business and minimal loyalty to the freight carriers, there’s little incentive for the freight transportation companies to provide complete and accurate data about the freight characteristics of shipments to the carriers. If the freight ends up being different than what they are expecting, the freight carriers can quickly renege on the pricing with the freight transportation companies.

GAINSHARING

Freight transportation companies impose fees based on least cost carrier options presented in savings proposals. If the gainsharing company can show a shipper savings, then the freight transportation company will share part of that savings with the shipper. For example, if a shipper was regularly paying $100 for a shipment and the gainsharing company could move the same shipment for $80 with their preferred carrier, then the gainsharing company might invoice the shipper $90, which would include $80 for the preferred carrier freight rate plus a separate $10 gainsharing fee imposed by the freight transportation company. With this scenario, the shipper pays $90 rather than the $100 they would have historically been charged and saves 10%, while the freight transportation company gains $10 for securing the savings. Henceforth, they both gain from sharing the savings.

GettyImages-682546800.jpgCost savings can be an advantage under this model, however, carrier selection and quality can be downsides. Under the gainsharing model, freight transportation companies often attain savings with lower quality, regional carriers who have explicit demands in certain markets within a specific time period. On occasion, freight carriers are willing to extend favorable pricing to freight transportation companies in exchange for their business at that particular point in time and, quite often, the freight carriers withdraw from the pricing agreements whenever the demand for that market is diminished.

With the gainsharing model, freight transportation companies might assert that shippers can use any carrier they want and emphasize they only get paid if they deliver cost savings. While this may be true, shippers can wind up paying a little more for using their carrier of choice because, whether used or not, if a carrier routing is presented and/or is available that could save money based on the initial benchmark, the freight transportation companies will often invoice the gainsharing fee for that shipment.

On the administrative side, freight transportation companies operating under the gainsharing model may charge fees for processing freight bills outside of their core carrier offering. As with each of the three types of freight transportation companies, gainsharing companies can offer a wide variety of software and technology solutions for numerous applications.

With the gainsharing model, freight transportation companies typically purchase the freight from the carriers and can adjust profit margins as necessary. Shippers ordinarily don’t have open access to carrier and shipment information direct from the carriers themselves because it would expose the profit margins of the freight transportation companies.

There are times when shippers can capture decent cost savings with the gainsharing model, however, to achieve savings, shippers must use specific carriers mandated by the freight transportation companies. Companies who don’t have time-sensitive freight and aren’t prone to freight damage tend to be a better fit for freight transportation companies operating under the gainsharing model. 

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FEE-FOR-SERVICE / COMMISSION

Under this model, the freight transportation companies routinely invoice shippers for their services upfront in the form of a service fee and/or they may receive compensation in the form of commission paid by the freight carriers. In exchange for a service fee paid to the freight transportation companies, which can be invoiced several ways, including on a dollar per bill ($/bill) or dollar per time period basis ($/month), shippers gain access to cost savings, administrative efficiencies and software and technology solutions offered by the freight transportation companies.

This model is all about transparency, as there’s little to no incentive for the freight transportation companies to deny access to carrier information. Since the freight transportation companies are not brokering freight, both the shippers and the freight transportation companies have direct access to the freight carriers and carrier information, meaning this model provides shippers with the most transparency of all the different models. The freight transportation companies are essentially a pass-through for information and function as an extension of both the shippers and carriers.

With this model, shippers maintain complete control of their freight and are free to use any carrier of their choosing without fear of penalty. Although carrier selection may not be as stout as the broker or gainsharing models, freight transportation companies operating under the fee-for-service model tend to work closely with higher quality carriers and function more as a partner with their carrier counterparts.

Administratively speaking, fee-for-service model transportation companies routinely process invoices for all freight carriers as a normal part of their service offering. However, unlike broker and gainsharing companies, the close-knit partnerships and long-term relationships this model has with their carriers often provides other valuable intangibles, like lower fuel surcharges and heightened claims liability limits.

While fee-for-service model freight transportation companies also offer a plethora of software and technology solutions ranging from routing and rating tools all the way to complete technology integrations with TMS, ERP and/or eCommerce platforms, when compared to gainsharing and broker models, this model’s technology offerings tend to be a bit more robust and customizable as a result of their faithfully aligned carrier partnerships.

There are different successful business models within every industry and the freight industry is no different. Each one of the three main types of freight transportation companies can offer unique advantages in certain situations.

 

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