Freight pricing: Spot rates vs. contract rates

The freight market can vary with the smallest change in business operations or our economic conditions. Some of the things we can prepare for, like the produce season or other seasonal freight. However, when certain businesses need to push more freight or when there are more trucks than loads, the market can become volatile.

There are two ways a driver can lock in a load: through contracts or the spot market. Here are the key benefits and shortfalls of both.

Contract rates

A contract rate is the price that a carrier and 3PL agree on to move a shipper’s freight in a set lane over a set period. This also means it will be the same freight type every time (cotton, food goods, etc.).

Contract rates offer a fixed-term (usually a year) security of both price and capacity. Locking in a rate for a year can be a gamble because the market could shift one way or another and carriers can get stuck with a cheap load or win big with a great rate while the market is down.

In 2018, the spot market was rising, and shippers tried to lock in higher contract rates in case the spot market rose even higher. Contract rates exceeded 10% year over year, and from mid-2017, the spot market had risen over the contract rates.

“When examining our internal data, we are certainly seeing some interesting trends. The spot market continues to dip well below the contract market,” said Nate Lourie, Chief Commercial Officer at Shipwell. “In some lanes, we are seeing spot loads being awarded at $.25 less per mile than the contracted lanes.”

Spot rates

Spot rates can be easily understood by applying the fundamental economics of supply and demand to shipping operations. This is a good starting point, but freight shipping is a bit more complicated than that.

Spot rates are for shippers who don’t typically work with contracts but need their freight moved regularly. These rates are also used when shippers need more capacity than contracted out at the time.

Usually, they will need product moving out of their warehouse fast to make room for more and need the trucks to get them on the road. If the product volume remains high, this could open the shipping process up to shippers offering contract rates to more carriers.

A spot rate is a price a shipper offers on the spot to move a load from point A to point B. They are so dynamic based on market conditions that they can change over the course of a day.

However, spot rates decline due to excess capacity.The volatility of the market is what sparked the idea of a “shipper of choice” award. Shippers decided to create the “carrier of the year” award to incentivize excellent service from carriers. Now, carriers are taking notes on shippers and touting the same award for excellent loading time, terminal amenities, freight management and friendliness.

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Working the market to your advantage

While larger carriers can often receive contracts for their trucks during low spot market times, the smaller carriers who depend on the spot market struggle. When the market stabilizes, the spot market lowers — it generates higher rates when the market is volatile.

One of the difficult things about using spot rates is that for shippers, 3PLs, and carriers it is difficult to manage finances and plan budgets. The variability of the rates coming in won’t allow businesses to create optimal budgets, or reduce costs, but only get them close to what they aim for.

“Our shipper partners that use the Shipwell platform to automate their tender process are asking us to provide more insight to service levels,” continued Lourie. “They want to identify poor-performing carriers and brokers so they can re-bid that lane out and get a much cheaper rate than they originally awarded back in 2018.”

Using freight tech to get on top of spot rates

Shipwell has a private, curated Load Board for shippers and 3PLs to give inside access to preferred carriers and their delivery routes. Bid on loads or book instantly with set rates all within the platform.

With this feature, carriers can go from booking a load to accessing the shipment information details and documents, all the way to tracking the freight and messaging the shipper or 3PL.

Even if you have a contract, you can import your carriers and rates and use Shipwell to track and mine transportation data to analyze your supply chain performance.

“We are also seeing shippers changing their process to push tenders to the spot market after the primary carrier rejects the original tender. Most shippers will have a primary carrier and then a secondary carrier assigned to a lane. Often if both reject it, it goes to a package of two to three backup carriers before hitting the spot market. Now, shippers want to push more to spot and are skipping secondary and backup carriers entirely," Lourie said.There’s no better time to optimize your business than now, and we want to help. Reach out and speak with an expert today to get started.

Get better freight rates with Shipwell