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 article, we’ll discuss the differences between spot and contract pricing, and when it makes the most sense to use one over the other.
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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:
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.
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:
Here are a few situations in which you would opt for a spot rate:
Related: Why Do Contract Freight Rates Change? (2 Reasons Your Rate May Need Adjustment)
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.
While spot rates are great for emergency situations, there are some drawbacks:
Related: What's The Real Cost of Using the Lowest Cost Carrier?
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:
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.
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:
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.