Maximizing Margins: Understanding Cost to Serve in Freight Brokerage

Maximizing Margins: Understanding Cost to Serve in Freight Brokerage

Freight brokerage revenues overall declined by 15.1% in 2023, according to Brush Pass Research, which said there were 27,206 active freight brokerages in the United States at the beginning of May. With so many brokerages fighting revenue losses, boardrooms are putting the “cost-per-load” metric under a microscope. It is essential for the freight brokerages to gain an understanding of the total, all-in cost of serving their customers on every load to maximize their margins. 

GEP defines cost to serve as “an analytical framework used to assess the true cost of meeting customer requirements. The broader objective of determining this cost is to streamline supply chain planning and decision-making to cost-effectively meet customer demand.”

Know Your Cost Allocation at a Granular Level

Digital services firm West Monroe said that in order to “determine a customer’s actual value to your business, you first must understand your cost of serving that customer.”

“Business leaders tend to believe they know what it costs to serve their customers. But few business leaders can answer questions such as: Do you price and align service levels accordingly? Can you isolate margins at the product level? How do the different regions you serve impact your bottom line?” West Monroe said. 

In freight brokerage, the cost to serve often is mistakenly thought of as solely the rate paid to a carrier. In reality, there’s more to a cost-per-load metric than that. Most business leaders understand that operating costs and overhead such as employee pay, office space and technology can be factored into a cost-per-load calculation. But freight brokerage is arbitrage; the game and players are constantly changing, and there is more financial risk involved in covering any given load.

Unpredictable carrier service erodes broker margins

Margins can erode when you make the mistake of working with unreliable carriers. These carriers’ poor performance – bounces, late deliveries, etc. – has a tangible impact on your cost to serve. The hidden costs of covering a load were very difficult to measure, but advanced brokerages have invested significantly in better understanding this incremental cost of goods sold (COGS) from service failure.

The Hidden Costs Brokers Need to Consider

Consider a familiar scenario: A broker covers a spot load for an important customer on an unfamiliar lane. Based on rates and tribal knowledge, they quote $1,500.  When they go to book a carrier to cover the load, they see the following five carriers, none of which they have worked with before:

Expected margins of working with five unknown carriers on a lane

Expected Margins:

  • Super Freight: $350
  • Local Logistics: $100
  • USA Haulers: $0
  • ACME Enterprises: $150
  • Plenty Logistics: $250


All five carriers are already in the network, and therefore have gone through the onboarding and compliance process.  So Super Freight is the obvious choice right? 

When you compare the cost to serve based on historical performance and service levels on that lane, you may actually end up paying far more than the carrier’s rate.

Performance adjusted margins of five unknown carriers 

Actual Margins:

  • Super Freight: -$100
  • Local Logistics: $0
  • USA Haulers: -$50
  • ACME Enterprises: $150
  • Plenty Logistics: $50


Why? Because service failures are costly. Brokers need to consider components such as:

  • The recovery rate of finding a new carrier
  • Overhead of time spent and opportunity cost of not covering more loads
  • Costly invoicing and accounts receivable processes
  • Dealing with claims
  • Management of carrier relationships.
  • Repairing relationships with unhappy shippers and losing future loads
  • Other accessorial or facility service costs such as delays and damage


In addition to the more predictable costs, such as:

  • Employee salary
  • Technology costs
  • Office rent
  • Training and professional development


You need to understand these costs to your business, and be able to factor them into a true cost-per-load calculation.

ISO Can Help You Measure the Costs of Carrier Service

ISO provides freight brokers with industry-leading performance measurement tools that enable them to balance costs versus service. ISO helps brokers:

  • Measure service-level performance.
  • Access and leverage comprehensive industry benchmark data.
  • Analyze competitors’ strategies and performance.


ISO tools include dynamic carrier and customer scorecards, which help freight brokerages measure:

  • On-time delivery
  • On-time pickup
  • Bounce rates and costs
  • Tender acceptance and rejection rates
  • Dwell times and facility scores
  • ISO Scores (a composite, industry-standard score of overall reliability)

ISO is helping some of the world’s largest brokers improve their margins and cost avoidance. Book a demo today.