Diversifying revenue streams is a strategy that offers several business advantages, one of the most significant being risk mitigation.
By expanding its sources of income, a trucking company, for instance, can reduce dependency on a single revenue stream, thereby minimizing the impact of several risks – including periodic economic downturns and market volatility, regulatory changes, dependency on a few major clients or the cyclical nature of industries – that could affect the organization as a whole.
Here are a few ways your company can look to better diversify revenues while mitigating risk:
Customer Base Analysis
One helpful objective is to create an ongoing understanding of your existing client base through customer segmentation, then analyze the contributions of each segment to your company’s revenue. This segmentation and related analysis is often delineated by industry and revenue stream/service offering, and helps management identify and categorize customer sectors into buckets like growth, stability and devaluation.
It also helps to understand your client base so it can be properly diversified and not run the risk of being comprised of a sole or small group of customers or a particular industry concentration. In general, if a large customer represents more than 20% of revenues, you may be exposed to customer concentration risk. How risky this concentration is for your business depends on a few factors, including the profitability of the revenue and how impactful losing the large customer would be together with the ability and promptness to replace lost revenue.
Especially for those existing large customers, it’s best to avoid relying on a sole relationship at a particular client. Rather, management should work at building strong, personal connections with the right people at various levels, including the C-suite. Also, when it comes to contracts with large customers, you should look to increase the strength and enforceability for breaking the contract where possible. If a customer is unwilling to sign the contract with conditions and share the risk, it could be a warning sign of future issues.
Expanding Service Offerings and Geography
An obvious but effective way for trucking companies to diversify revenues is to expand service offerings beyond traditional freight transportation. Easier said than done, perhaps, but by incorporating brokerage and supply chain management services, for instance, trucking companies can create additional value for clients and generate new income streams, even with existing customers. With IBISWorld market research reporting that the U.S. freight brokerage business grew 4.8% per year on average between 2018 and 2023, the freight brokerage segment has seen rather explosive growth over the years, and the forecast for the coming years is positive. According to Mordor Intelligence’s market research, the industry’s forecasted compound annual growth rate (CAGR) is 8.35% from 2024 to 2029.
As the DAT Freight & Analytics’ data on rates depicts, specialized freight services like reefer, hazardous materials or oversized typically command higher prices and are in niche markets attracting clients with unique needs.
Another diversification opportunity is geography, which could involve opening a terminal across the country to reach new customers in new regions or even mean expanding internationally. A trucking company operating primarily in the United States, for example, might consider expanding operations to emerging markets in Mexico and Latin America. The globalization of supply chains and the increasing demand for cross-border transportation are cause for review of a company’s presence in particular markets.
Reducing Deadhead Miles and Converting a Portion of Them to Revenue-Generating Miles
It’s estimated that between 20% and 35% of trucks in the U.S. travel empty. Not only are the vehicle and its driver not earning revenue for being on the road, they’re also burning through fuel and adding mileage and wear onto the tractor and trailer. These “deadhead” miles can be a drag on a company’s finances and productivity, particularly when fuel prices are at current levels.
Organizations should place extra emphasis on operational efficiency in the coming year and continue to adapt to demands of the market, including route optimization, delivery consolidation and improved real-time tracking. Technological investments certainly have a price tag, but leveraging digital tools and platforms that use advanced telematics, real-time tracking and data analytics might provide a return on investment quicker than anticipated.
Diversifying revenues is crucial for the long-term success and resilience of trucking companies in a rapidly evolving industry. Schneider Downs’ Transportation and Logistics professionals possess the most current knowledge of transportation issues, regulations and trends, and can work with you to seek innovative ways to reach your strategic goals.
About Schneider Downs Transportation & Logistics Services
The Schneider Downs Transportation & Logistics industry group includes assurance, tax, technology and management consulting professionals who combine their individual expertise to serve transportation and logistics companies throughout the United States. We possess the capabilities and industry expertise to provide our clients with state-of-the-art technologies and timely communication of the most current and pervasive legislative and regulatory changes impacting the industry.
To learn more, visit our Transportation & Logistics Industry Group page.
