The COVID-19 pandemic has highlighted just how essential trucking is to North American society. Through lockdowns, through surging demand for groceries, through all the twists and turns we’ve taken, truckers have risked life and limb to keep things rolling.
And yet, despite some increased recognition and what promises to be a massive peak season, by and large, it hasn’t gotten any easier to make money moving freight. According to numbers from the TCA Profitability Program, whether you’re talking about reefer, dry van or flatbed, the average carrier still earns less than a 4% profit margin.
Why Trucking Companies Don’t Earn What They Deserve
Despite providing an essential service, trucking remains a tough business for all the reasons folks with decades of industry experience know too well.
1. Low Barriers to Entry
It’s easy to get into the trucking game. So when rates are good and the industry is booming, capacity floods in. Supply increases, available trucks become easy to find, profits disappear, and the booms turn to busts.
2. Hard to Differentiate
A related problem is that many shippers view truck capacity as a commodity. Beyond reliably delivering goods on time and in one piece (easier said than done), it’s difficult for a trucking company to provide a service that’s noticeably different from their competitor down the road. In an effort to reduce costs, shippers constantly go looking for lower rates, forcing carriers to compete on price and putting constant downward pressure on their margins.
3. Difficult to Find Economies of Scale
The biggest 25 carriers still account for less than 10% of the freight market and 95% of carriers run twenty trucks or less. That’s because it’s so hard to grow revenue without growing costs. Fuel. Wages. Equipment, maintenance and insurance. Almost all the biggest trucking expenses are variable. The more freight you move, the bigger your bills. It takes skill, dedication and an extremely well-run operation to break free of the bottlenecks and grow a profitable trucking business.
4. Rising Costs Are Difficult to Pass On
Insurance premiums have skyrocketed in recent years as a result of increased nuclear verdicts. Many trucking businesses that have gone under in recent years have cited rising insurance costs as a key reason why. Driver wages have also been on the rise as a result of the persistent shortage of quality drivers, something the pandemic has only made more severe.
But because of the dynamics of the industry, carriers are often forced to eat these costs rather than passing them along to shippers.
5. Cash Flow is Always Tight
A final reason it’s so hard to get ahead in trucking is that costs always come first. Trucks. Fuel. Wages. Everything comes out up front, and revenue always lags behind. As a result, carriers are constantly squeezed to make ends meet and are often forced to turn to factoring companies to collect receivables sooner, further eroding profit margins.
Put it all together and it’s tough to make a good living.
How Trucking Companies Grow Their Bottomline
Despite the constant challenges, lots of trucking companies do succeed year after year at turning a healthy profit and continuing to grow. How?
Many trucking companies find success by dominating a niche. They become THE car hauler or THE food and beverage guys. By focusing on a specific type of freight, companies are able to focus their efforts and develop expertise. It becomes easier to build a reputation and trusted name and it makes it easier to optimize and find efficiencies in their freight network.
The other option is to diversify, providing more services to a core group of customers. Instead of narrowing down, the idea is to provide customers a more complete service offering. For instance, by doing drayage, full truckload and LTL. Or another approach is to diversify into goods that tend to flow in opposite directions in an attempt to minimize deadhead miles and maximize money on backhauls.
A strong and healthy culture is essential for trucking companies to grow larger because people have to care about doing all the little things right. Trucking is a game of inches. You need a culture that cares about safety, about providing customers with excellent service, about taking pride in the work they do. This is how you build a reputation for reliable service and safe driving. It’s also how you reduce the costs associated with recruiting and retaining drivers.
4. Technology Investment
Technology allows trucking companies to differentiate their service (by providing faster and easier visibility for instance) and to overcome the common bottlenecks to growth. Technology helps companies find those economies of scale that are so difficult to find.
Here at Microdea, for instance, we’ve helped hundreds of trucking companies keep their back-office costs in check while continuing to grow load volume. Instead of constantly hiring more administrative staff, they’re able to do more with less, invoice and collect cash faster, and run a more efficient, more profitable operation.
5. Continuous Improvement
Finally, no trucking company remains profitable without a commitment to continuous improvement. The best run trucking companies are obsessed with efficiency and figuring out how to do things better than the day before. This constant search for improvement is imperative to finding ways to save money, ways to improve the customer experience, and ways to outperform the rest of the industry.
The Long and Short Of It
Due to structural problems with the industry, it’s harder than it should be to make good money moving freight. Truckers don’t make what they should and companies often find themselves on the brink of bankruptcy. Hauling freight is an essential service, but one that still goes underappreciated and underpaid.
The silver lining is that it isn’t impossible to grow a profitable, long-lasting trucking business. With the right strategy, good people, great technology, and a commitment to continuous improvement, there’s money to be made while providing an essential service to the communities we know and love.
Founded in 1995 and headquartered in Markham, Ontario, Microdea is a fast growing document management and automation software company serving hundreds of customers in the transportation and logistics industry, including truckload and LTL carriers, private fleets, brokers and 3PLs.