Depending on how frequently you ship freight, you've probably had the debate on whether you should use the spot market versus the contract market. After all, they are two of the most common pricing options when shipping truckload freight.
Determining which rate is best for your full-truckload shipping needs can be challenging, so it’s important to understand how each one works. Doing so can help you determine which type of rate to use for each load, enabling you to manage your freight budget more efficiently and save on shipping costs.
We've been helping customers with both types of freight rates for more than half a century, so we understand what makes the most sense based on your unique needs.
In this blog, we’ll discuss the differences between spot and contract pricing, and when it makes the most sense to use one over the other.
What Is a Contract Rate?
A contract rate is a fixed price and volume commitment for a set lane over a set period of time, usually one year. Once you agree to a rate, you are better able to forecast your spend and are less subject to market fluctuations as you have an agreed-to price. Some shippers and transportation providers may even agree on expectations for when a rate can be renegotiated, allowing the provider to give a more discounted rate knowing they have less downside risk.
Contract rates are broken out into:
- Line-haul rates: These show the cost of transporting goods over a specific route, between point A and point B.
- Accessorial rates: These are any additional charges that may make shipping more costly for a carrier. The most common of these is the Fuel Surcharge rate, which is based on the Department of Energy's (DOE) index for nationwide diesel prices.
Because contract rates have a fixed term, they offer the security of both price and capacity, which is beneficial for companies looking to maintain their bottom line. With contract rates, companies can budget and forecast better as an organization. They also don’t need to go back into the market with each shipment, which can save on administration headaches.
Why a Business Would Choose Contract Rates
When you lock into rates with a contracted carrier, you experience predictable costs and the opportunity to negotiate fuel and accessorials that are otherwise fixed in the spot market. This can also help with your administrative efforts, reducing time and effort negotiating a price and ensuring availability on each and every load.
You may also experience higher service levels, as the longer and more consistently you work with the carrier, the better they get to know you and your needs. When you work with the same carriers, personal relationships develop that can mitigate problems (e.g., better service can result in fewer late deliveries fines). Additional benefits of a long-term relationship with a consistent partner include:
- Priority access to capacity in periods of high demand
- Knowledge of your processes and warehouses
- Reduced likelihood of damages
Why a Business Wouldn’t Exclusively Use Contract Rates
Here are a few situations in which you would opt for a spot rate:
- Inconsistent Volume Spikes: Large volume spikes can overwhelm your service providers, making it difficult to meet your shipping needs.
- Irregular Shipment Timing: If you don't require the same capacity each month, contract rates might not be ideal as inconsistent shipping volume may take you outside the terms of your contract and/or require supplemental spot shipments.
- Inconsistent Routes: A company’s freight doesn’t consistently follow the same shipping lanes, resulting in it being difficult to commit enough volume that would support advantageous rates on any individual route.
What Is a Spot Rate?
A spot rate is a one-time price offered “on the spot” by a freight service provider to move a shipper’s freight from point A to point B. Spot rates are valid for a short period of time and are subject to real-time fluctuations in the market. In other words, they change day to day.
Spot rates are not only market-driven, but they can allow you to find capacity for your last-minute shipments. There are spot rates for both full truckload and less-than-truckload (LTL) shipping, which includes dry van, flatbed and refrigerated shipping.
Spot rates are largely driven by supply and demand. A market with higher demand for trucks/capacity and limited supply will lead to higher prices than a market with lower demand for trucks/capacity and higher supply.
Why a Business Wouldn’t Exclusively Use Spot Rates
While spot rates are great for emergency situations, there are some drawbacks:
- Less accountability and security: When primarily opting for spot rate pricing in your shipments, you don’t have a chance to build a relationship with any given carriers and continue with what you have.
Each carrier requires different agreements, and the carriers used within a given freight lane will be fluid with each shipment. These short-term, transactional relationships, along with other discrepancies that can often come with them (e.g., inconsistent insurance regulations and service levels), might result in a lower price in the short term, but in the end might end up costing you more.
Related: The Real Cost of Using the Lowest Cost Carrier
- Lack of trust and stability: The relationship between you and the carrier may lack the trust and stability and confidence that are established by long-term contracts. When the carrier base is fluid, it’s difficult to manage requirements and measure performance against key performance indicators (KPIs) to drive improvement.
- Challenging budget planning: Spot rates can fluctuate and change with capacities at any given time.
- Frequent negotiation: Relying consistently on spot rate pricing takes more time out of a logistic professional’s schedule. Because pricing isn’t fixed for any set period of time, there is a constant need to negotiate new shipment rates with each load to meet capacity needs.
Determining Which Freight Rate Is Best
It’s important to know that neither contract nor spot rates may meet a business’s needs exclusively. If your company handles most shipments via contracts, it’s worthwhile to take a look at trends in the spot market and vice versa.
If you determine your volume is often sporadic and you do not have consistent lanes that you ship to, you still can partner with a carrier contractually. This will allow you to have all of your terms and conditions, insurance requirements spelled out, and a general understanding of how they do business ironed out before they move freight for you. Having an approved carrier list is a must, even if you go out for spot price on every load.
Determine what matters most to you. Is it price sensitivity? Is it service? Is it reliability? A company with heavy shipping volume may use contract rates for regular shipments and spot rates for emergencies. Before making a decision, ask yourself the following:
- Will your shipments be impacted by the season?
- Can your business handle price fluctuations?
- Does your contract rate guarantee capacity through the year without a general rate increase (GRI)?
Also, take into consideration the type of commodity being shipped (high or low volume), the delivery timeframe (faster = more expensive), the weight of the freight (heavier = more expensive) and the specialization required by the carrier.
How an Experienced Carrier Can Help
When it comes to pricing and rate structures, it’s important to work with carriers who understand the fluctuations during challenging times and can ensure the best possible experiences and coverage during peak demand times — and through normal market conditions, too.
Focus on choosing carriers that can be flexible and have the experience, technologies, network and fleet size to accommodate your needs, even (perhaps especially) when it’s last minute or unexpected.
For more than six decades, ATS has offered full-service, experienced transportation solutions that help keep supply chains running smoothly and customers happy. We provide:
- Consistent up-to-the-minute delivery windows
- Dedicated shipping options
- Thousands of company-owned tractors and trailers to meet your emergency shipping, irregular, on/off and seasonal shipping needs
- World-class drivers who are experts at what they do
- Access to tens of thousands of trusted partner carriers
When we say we’ll do something for you, we’ll do it the right way. That goes for pricing too. We’ll provide an accurate quote upfront and stick to it, whether you need a dry van, flatbed, specialized or another type of quote. Contact us today to learn more or reach out to request a quote.