Loose vs Tight Freight Markets
As a broker in the world of transportation, available and serviceable freight can be very difficult to come by. Mainly because it’s an over-saturated market, meaning the number of brokers out number the number of shipments available to cover.
Carriers will look at regional markets in a similar fashion. Are trucks outnumbering the amount of shipments going out, or are there not enough trucks in a region to cover freight that needs to be shipped.
The answer to this question plays a big factor in determining transportation costs. Both markets are what is known as a loose and tight market.
A loose market, or soft market, is one where there are fewer shipments than trucks. So shippers and brokers have lots of trucks to choose from in a given region, putting leverage in the hands of shippers.
Brokers, dispatchers, logistics coordinators, owner operators, or whoever is looking to get a truck rolling will be at a disadvantage when it comes to negotiating prices because shippers will have plenty of options at their disposal. They can go out and find the cheapest truck possible.
These big shipments that take up an entire 53 foot semi-truck do not compare to the shipping costs we pay when ordering something on Amazon. You might pay $10 to get your small package delivered to you. But a 40,000lb order of product going from Los Angeles to Houston, for example, can cost anywhere from $2,500-$3,000. Being able to cut costs on these big shipments is important to businesses.
So, in a loose market, the number of trucks is greater than the number of shipments available. As a result, shippers are at an advantage in terms of getting a favorable price. Meaning brokers, carriers, and drivers are being paid less.
The exact opposite to a loose market is a tight market where there’s more shipments going out than trucks available. You know what’s worse than paying a few extra hundred dollars on your shipment? Being the vendor that doesn’t get needed material to a customer. That could cost your reputation and in turn your entire business. So to avoid this mistake in a tight market environment, you’ll be more lenient spending on transportation to maintain your businesses reliable reputation.
In these tight environments, there is a lack of capacity, or truck availability. This means that truckers have their pick of the litter. They can be more selective with the loads they choose to haul.
Some drivers may only want to deliver to certain regions, haul a certain commodity, carry a certain weight, be paid a certain amount, or whatever it may be. In a loose market, you’ll take what you can get. But in a tight market, you take what you want.
It’s advantageous for carriers, brokers, and drivers to be in a tight market. It allows us to be competitive with our services vs being competitive with price. Sometimes you just can’t beat someone’s price, but I think you can always beat someone’s service.
Let me expand on that.
If you’re a shipper and having trouble finding a truck (tight market) you won’t be too picky with who’s hauling your freight. As long as they’re getting it done.
If ABC Trucking is moving your shipments every week but always sending drivers in late, not communicating with updates, delivering to your customers late and just not servicing you well, it sucks but there’s not much you can do in a tight environment.
However, if I come along as XYZ Transit and offer my services with 100% on time rate and regular updates, you’re going to go with the better service. And as XYZ Transit, I could charge the same price and beat ABC strictly on service.
Now that I’m providing exceptional service to a shipper in a tight market, they will want to hold onto me as their transportation solution that’s not as readily accessible. And that leaves me the power when it comes to price.
Now, I’m XYZ Transit providing the same service to a different region that’s in a loose market. There are 10 other XYZ Transit companies just like me offering the same exceptional service. The shipper has no worry that their freight will get covered with exceptional service. The only thing they have to worry about is paying too much on transportation.
If you don’t have a standing relationship, a referral, or some personal connection to a shipper in a loose market, it can be very difficult to get business without being the cheapest option.
What a lot of shippers do is have a list of 5-10 brokers or carriers they work with and make them all bid on each shipment. A few days before an order is ready to ship, they’ll send out the info and ask for rates back and then go with the lowest bidder.
This makes your job as a broker more difficult. First of all, you have to be precise with your bids. If you think you can book a truck for $1,000, you want to make a margin on that. We call a healthy margin anywhere from 15-20%. In a loose market, you can’t bid $1,200.
You have to think “Okay, if I know I’ll have to pay a truck $1,000, I can probably find one for $900. And in order to be competitive, I’ll take a 10-15% margin. So now if I’m paying a truck $900 and want 10%, I’ll bid $990. But to avoid matching someone else’s price, I’ll bid $985.”
So now, if you win the load, you’ll have to speak with probably twice as many dispatchers in order to secure a truck at $900 and you’ll only be making 10%. And again, that’s IF you win the load.
Markets can be tight or loose dependent on region and also dependent on the overall transportation market. Right now I’d definitely say we’re in a loose market overall. While there are some tighter pocket regions, the overall space is loose.
There’s a million brokers out there calling shippers every single day with trucks at their disposal. As a result, to get your foot in the door, you have to be competitive with price. And that alone won’t win you freight. Because these shippers are hearing from multiple brokers every single day offering the same service. They’re not being offered anything different than what they’ve already got. So, if they’re being serviced well for a competitive rate, there’s no real reason for someone to switch transportation providers.
The trick is try and create those opportunities by asking the right questions, providing better solutions, being more professional, being more personable, naming the right price, and honestly, it’s getting a little lucky.
To wrap it up, if you’re a shipper, you want a loose market. More transportation solutions are available to you and you’re able to leverage that available capacity for cheaper pricing.
As a broker or carrier, you want a tight market. If you have available trucks in a tight region and provide good service, you’re able to leverage that to get you and/or your drivers paid.