Strategy comparison: digital freight brokers vs smart tendering

A freight brokerage is a freight brokerage, digital or otherwise. Either way, the primary goal is to serve as a middleman who brings together shippers with freight to move with carriers that can make it happen. So, why the growing emphasis on “digital” freight brokers over the past half-decade, particularly in the spot freight market?

Pure and simple, it’s a way to distinguish companies built in the internet age. A company such as Arrive Logistics started on Day One in 2014 with a different set of assumptions about how people would work together than, say, a C.H. Robinson, founded in 1905. It’s similar to the difference between traditional brick-and-mortar and e-commerce in the retail space—each delivers essentially the same goods and services; choosing one over the other is a matter of customer preference.

Is a digital freight broker (DFB) more appealing for shippers and carriers navigating the spot market than a traditional broker? Probably not. Carriers shrug their shoulders; digital does not carry a lot of weight with them. Shippers, meanwhile, do tend to value investments in technology, particularly those that have to do with the myriad of touchpoints involved in a spot freight truckload.

A sleek user-friendly interface could sway some shippers to the digital side of freight brokerage. Any company that brands itself as a DFB targets investors to fund growth. Positioning as “digital” sends a clear signal to investors, saying in essence, “We will be fast-growing and able to eat the market in a way that the traditional broker couldn’t. The economics of brokerages won’t apply to us; we’re more in the software category.”

It is clear that new technologies are emerging that will change the very nature of logistics sourcing, but where does digital brokerage fit in that transformation? This article delves into the real impact of digital freight brokerages and how other emerging technologies push boundaries beyond the DFB hype.

Is broker technology a true differentiator?

The prevailing sentiment in the industry is that the digitisation of global supply chains will drive improved efficiencies and profitability. But how is the emergence of digital brokerage and related technology helping us to get there?

While some say technology makes them more resilient, most others contend it helps them make more money by spending less on the capacity they are reselling to shippers. In truth, however, any claim of having superior technology should somehow manifest in a company’s performance in one or more of the following ways:

1. Lower cost to sell
2. Lower buy rate
3. Lower overhead / higher operating margin

By those metrics, it’s not always easy to tell whether the technology of a digital brokerage, say, an Uber Freight or Convoy, delivers real financial impact when compared to a traditional brokerage like a Coyote or Lineage Logistics. Convoy, a private company, makes information available in periodic snapshots based on fundraising. Uber Freight is a public company, so there is enough insight available to conclude there isn’t a discernible difference or bottom-line impact.

Weighing the costs

So, if digitisation alone isn’t a major differentiator, why work with a digital freight broker to procure capacity in the spot market? One advantage for shippers is that a DFB often is willing to subsidise the costs to get the business. It is not uncommon for a DFB to accept markedly lower margins in the quest for customer acquisition. They can lower their rates because they have investors willing to lose money in the short term to subsidise them, which means shippers will get lower rates — 5% cheaper than the market in many cases.

To their credit, Convoy and Uber Freight have done a few things that traditional freight brokers have been slow to pick up on. Instantaneous bids and quotes in the spot market, for example, deliver a small lift in margin. Slick front-end tools also give shippers and carriers a user-friendly interface.

Using the best of both worlds to succeed in the spot market

Traditional freight brokerages, the incumbents, have well-established distribution superiority. Digital brokers, the upstarts, bring a digital-first business model. But what both miss today — and what pure-play SaaS players like Transporeon represent — is that the addition of machine learning and data science are already in play in a way that brokerages, digital or otherwise, have not yet been able to replicate.

Is it possible for a shipper to use a data science approach such as the one Transporeon offers in conjunction with a digital freight broker? Sure, and in fact, many try to do so – although they are not always targeting the same things.

For instance, let’s say a brokerage works with a thousand carriers. Today they use analytics to come up with suggested carrier lists or rate ranges, which are then delivered to a carrier sales representative. They also try to predict freight pricing: At “X” price, we will definitely get capacity; at “Y” price, we will get 50% capacity, and below “Z,” we won’t get any capacity. Once the carrier rep picks the price, this is what all carriers see. From our perspective, it’s astonishing how so few brokers understand the weakness of this approach.

Why? It’s adverse selection. With any load, there exists a random distribution of what prices carriers would accept, and at any number within that range are people who would accept lower or higher than the average price. Going with the mean or mode means the average carrier is getting more money than they needed. As brokerages have always averaged their way into pricing, it’s challenging for them to think beyond this.

The Transporeon data model and behavioural science approach, on the other hand, utilises smart tendering and carrier profiling for individualised rate targeting. Let’s say a shipper has 10,000 carriers and one shipment. The Transporeon model can generate 10,000 tendering plans for 10,000 carriers, averaging 8 to 10 unique offers per carrier over a set period. Rather than averaging, smart tendering understands the propensity of a specific carrier to accept a specific price, thereby lowering rates.

True, using a digitised load board as most DFBs do will create some margin lift, but that lift may send shippers down the wrong path. What they are currently missing is the targeted offer model supported by data science. There’s a significant fiscal benefit in taking a price from a carrier sales rep who says I can get someone to do this for $1,000, and then you flip that; I’ll offer $950.

How Transporeon differs from brokers and digital brokers

Unlike a broker, Transporeon does not act as a middleman looking to secure its own margin. It acts only as a software layer that automates carrier and rate assignments on behalf of a freight buyer. This means that Transporeon can be used both within and alongside brokers.

For brokers, using smart tendering gives them the ability to take innovation into large-scale operation years ahead of what they would do if they had to build it in-house. A shipper could utilise procurement tools like Transporeon smart tendering and multiple digital freight brokers which gives shippers a lot more options. When the venture capital money subsidising freight rates dries up—and it will eventually—how will shippers know they’re getting the best deal if they’re sourcing from a single broker?

Benchmarking is a crucial aspect of competition and shippers active in the spot market should arm themselves with tools like Transporeon smart tendering that can continue to help them eliminate waste, increase efficiencies, and achieve a sustainable price advantage.

The future of digital brokers

What’s in store for the digital brokerage segment? In short, digital freight brokers will continue to evolve in line with traditional brokerages. All will get more efficient over time, but digital brokers won’t get there much faster than the rest of the space. The real story is that traditional brokerages will get more tech-oriented and start to look more like DFBs. The ones that don’t will fall out. This much is also true: The funding DFBs rely on to subsidise pricing will start to dry up and will eventually disappear. 

It’s time for a new spot freight market buying strategy

As a shipper, are the carriers you contracted with less than a year ago letting you down, forcing you into the spot market where you are out of control? Are you getting good spot prices? Are you assigning them to the right carriers? The truth is, you should not have to wonder whether you are getting good spot prices or assigning to the right carrier. Nor should you have to passively wait at the mercy of bids to know how much above the budget you will be or if you can even ship at all.

It’s time to be more in control of spot truckload buying. You need the insight to find new carrier options, look at new lanes, understand the true pricing, bid with confidence on the true market rate, easily go back and forth on offers, book, and continuously improve.

Contact Transporeon to schedule a demo and learn more about how an approach to spot freight procurement that is driven by AI and machine learning can be your strongest strategy.