Increase Margins for Entrepreneurial Freedom
A good way to maintain a healthy business is to have all your bills covered and have plenty left over for yourself. We’ve written on how to put profits first, but that profit can only come from your margins.
Regardless of how much revenue you move, you need to consider your margins.
It might sound nice to have made 12.5% on a million dollars of freight moved. You can do a lot with $125K. But what could you do with the industry standard of 15%? Or better yet, 18%? What do you do with an additional $55,000 that took virtually no extra work?
Of course, if you’re an independent broker, you’re not keeping all of that. You’re paying for your operating authority, surety bond, insurance, etc. Those expenses eat into your margins. According to one of our agent recruiter’s calculations, 15% on a million dollars of revenue will only equate to around $60K in your pocket.
As a freight agent, you’ll have a commission split between yourself and your 3PL. Industry standard splits are around 50-70%, but for moving about a million dollars of freight, you’d be earning around 60%. So the final number in your bank (all other things equal) is something like $90,000 to $105,000.
The more you up your margin, the better your paycheck. All this for – and I can’t stress this enough – the same amount of work.
How to Increase Margins
Moving forward under the assumption that you’re convinced you’d like to increase margins, let’s talk about strategies to get that extra margin.
Agent Recruiter Katie Ireland insists to her brokers to keep their margins up because they’re worth it. Katie insists that brokers need to stick to their desired margins and not compete in that race to the bottom to secure freight. “Turn away low margin rate. It’s not worth your time.” She recommends, “If you’re working to book a truck and only charge a 10% margin, you’re not earning enough for the work you do.” It’s earning the right dollar for your value.
We wanted to give brokers a little taste of Katie’s business coaching. Apply her advice to your brokerage today. If it works, you’re welcome to connect with Katie and access more of her nearly twenty years of business development experience by applying to our LDI Freight Agent Program.
Step 1: Prospecting
The first step is to increase margins is prospect new business. It’s easiest to ramp up margin with new customers rather than old customers, but that’s getting ahead of ourselves. Let’s focus on why prospecting is the first step to increasing margin.
We’ve said it before and we’ll say it again: if one customer makes up 10% of your business, you need to diversify your book of business.
If you look through industry leaders’ advice, they say “no less than 3 calls a day.” Katie says that number should be more like 10.
“Put in an hour a day, whether it’s research or calling. At the least, have 10 good conversations a day, and you’re following up.”
Following up on leads you called the previous week is a key part of prospecting, and the best brokers make those follow up calls personal.
This next tip is unique to Katie’s brokers, so take note:
“In prospecting, we have to keep track. If you prospect 10, those need to be in a spreadsheet and you’re keeping track of those contacts.”
Katie recommends keeping track of all prospect and customer information: dates of contact, notes of what was discussed, etc.
Basically, Katie is saying the digital spreadsheet is the new rolodex.
Step 2: Set the Tone in the Beginning
The second step to increase margins is to set the tone in the beginning.
“Typically we have a conversation about how they’re prospecting.” She said of the brokers she mentors, “If they’re relying on their existing customers to give them a boost, it won’t happen. The margins typically decrease. The customer will usually drive the market, and with fluctuations, the margins are bound to go down over the course of your partnership.”
Brokers need to expect their customers to continuously demand lower prices over the course of a working relationship. It’s crucial, therefore, to agree upon a favorable rate in the beginning. Begin on a rate that you will feel comfortable losing a few percentage points over several years of working together.
Step 3: Keep a Healthy Book of Business
Regularly give your book of business a health checkup. This is because, per Step 2, your older customers will eventually whittle margins to nearly inoperable numbers.
Katie says: “Have a good look at your current book of business. What customers are low margins? Choose to either pay less on the carrier side of things, or cut ties.” LDI’s Agent Development Manager, Mike Velez, overhead this conversation about prospecting for new business to cycle out old business. He completely agreed with Katie and mentioned, “As soon as an Agent finds a new customer who can replace the volume of a low margin customer, I strongly recommend they cut the low margin customer.”
But What About My First Customer Who Got Me Off The Ground?
Now, there is something to be said for loyalty. Do those customers treat you kindly? Do you truly enjoy working with them? Do you know they really can’t go higher in price? Are you really ok making no money performing work for them?
If the answer is “yes” to all of the above, you can consider that customer your charity case (because at this point, that’s what they are).
If the answer is “no” to any of those questions, you need to prospect to replace them, or demand they meet you in the middle.
It goes right back to what Katie said in Step 1: low margin customers are not worth your time.
It’s All About Rinse and Repeat
You could try to negotiate from the carrier end, but we don’t recommend always squeezing carriers. Strong carrier relationships are crucial to the success of your brokerage, so you need to treat them right. When it’s appropriate to haggle, do so. But remember, they’re trying to make a livable wage too.
You might dread prospecting (step 1), but with practice you become better and better at it. It might not be comfortable to talk about margins with your new customers, but it’s easiest to set the tone in the beginning (step 2). Be certain to highlight what the customer gets with you: attention to detail, dedication to cover difficult loads, accountability, accessibility, etc. Finally, be a good entrepreneur and evaluate your book of business regularly. You know as well as we do that you’re running a business, not a charity. Earn enough margin that you can support your favorite charity and let those experts do it. You’re an expert at moving freight.
Apply these steps to your brokerage today. Increase those margins and know your work is worth those dollars!
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