Contract vs Spot Rates
In the logistics and transportation industry, carriers and shippers rely on each other to transport goods and products from one place to another. Transporters play a crucial role in providing the necessary equipment and drivers for transportation. To ensure efficient transportation of goods, shippers and carriers must agree on the pricing terms, such as contract or spot rates. By understanding the differences between both rates, an informed decision can be made that benefits their businesses.
Spot Rates
Spot rates or market rates are priced on a one-time/load-by-load basis based on current market conditions. The market conditions help haulers determine what to charge shippers who need to transport goods urgently. For this reason, carriers have more control over their operations, allowing them to take advantage of the market conditions. Additionally, this pricing model relieves carriers from any long-term commitment to shippers or volume of business. This gives them more freedom to pursue other opportunities and manage their risks.
On the other hand, supply and demand are rapidly fluctuating, making spot rates unpredictable and volatile. This can result in lower profits for carriers who can’t find enough loads at a high enough price.
Contract Rates
Contract rates are negotiated deals between the shipper and carrier for a specific period. These contracts offer stability and predictability in an ever-changing market. First and foremost, carriers must submit their bid to earn the shipper’s business and get a contract. Once the contract is won and signed, they are committed to providing transportation for a set number of the shipper’s loads during the agreed-upon time. This provides a predictable and reliable source of business that carriers and shippers can use to plan for the future and invest in equipment and personnel.
Unfortunately, contract rates are typically more favorable for shippers because they offer shippers a fixed price for a specific volume of business. Even if the market changes to where that volume is worth more, the carrier is only paid the contracted rate resulting in them receiving lower profits. Checking the current spot rates can be a good indicator of future contract rates.
Getting the Contract
The process of how carriers get contracts with shippers requires careful planning, negotiation, and execution. Haulers must understand the needs and preferences of shippers to secure beneficial deals. By building strong relationships and demonstrating a commitment to quality service, carriers can create mutually beneficial partnerships to sustain their business in the long term.
The Difference in Pricing Models
| Spot Rates |
|---|
Flexible |
Typically More Favorable for Carriers |
Dependent on Market Conditions |
Short-Term Pricing (Volatile) |
One-Time Quote |
Covers One Load |
Higher in a Carrier's Market |
| Contract Rates |
|---|
Fixed |
Typically More Favorable for Shippers |
Dependent on Multiple Factors |
Long-Term Pricing (Stable) |
Bid-to-Win |
Covers Set Shipping Volume |
Higher in a Shipper's Market |
Where to Find Loads
This following is not a complete list, but instead hits on some of the main places carriers can find loads with shippers.
- Freight Brokers – Freight brokers act as middlemen between shippers and carriers by facilitating communication. Brokers arrange the transportation of property by an authorized motor carrier for compensation. Building solid relationships with reputable freight brokers helps haulers to make and strengthen their freight network. In turn, carriers can leverage these relationships and networks to increase the chances of referrals and loads.
- Dispatchers – Dispatchers manage the schedules of key industry players and can point carriers in the direction of brokers or shippers who might need their services on a long or short-term basis. Haulers who create and maintain a strong rapport with dispatch companies can leverage those relationships to obtain competitive contracts. However, these relationships are transactional, meaning they must share some of their profits with the brokers or dispatchers. Therefore, trucking companies should conduct comprehensive background research before entering business relationships.
- Do It Yourself – Reaching out directly to shippers or freight companies takes the middleman out of the equation. Calling, mailing, and networking at events or through associations help carriers build their freight network on their terms. While doing it yourself empowers carriers and gives them complete control, it creates additional work on top of their other responsibilities towards running their trucking company.
- Load boards – Load boards, located online, are marketplaces where shippers and brokers post loads that need hauling. They are known as one of the simplest ways to find freight. However, load boards are full of competition. This is why networking and building connections are crucial, for it could help a shipper choose carriers they know on a load board over a stranger.
Using Both Pricing Models
With the logistics industry continuously evolving, carriers must remain adaptable and innovative to stay competitive. This includes utilizing spot and contract rates to make the most of their trips. Using both rates gives trucking companies a balance of revenue stability and flexibility while allowing them to take advantage of profitable opportunities in the spot market. Also, carriers can manage risk and diversify their customer base, leading to long-term growth and profitability.
Benefits of Using a Mix of Contract & Spot Rates
- Revenue Stability
- Flexibility
- Increased Profit
- Risk Management
- Diversification
Using Both Pricing Models
Safety and compliance are a carrier’s best friend in helping their company stand out. Haulers with poor safety scores and multiple compliance-related issues create a red flag that deters shippers from wanting to work with them. Carriers can demonstrate their commitment to safety and compliance by utilizing safety programs like Marquee’s BOOST program and monitoring their drivers’ behaviors to maintain good safety scores.
Another way to stand out is through a professional company website. With a website, shippers are able to find more information about the carrier. Websites also help to legitimize a business in the eyes of freight brokers/shippers, and it has never been easier to build a company website. Marquee’s sister company, OTR Solutions, offers this type of service through their program ELEVATE. This program creates advantages for trucking businesses by increasing the chances of securing higher-paying freight loads.
Summary
Overall, the trucking industry is the backbone of the economy, moving goods and products across the country. To ensure efficient transportation of goods, shippers and carriers must agree on pricing terms, usually based on contract or spot rates. Contract rates offer stability and predictability, while spot rates provide flexibility and immediate availability. Depending on their business model/needs, a carrier or shipper may choose to use contract rates, spot rates, or a mix of both rates. No matter which path works for their business, carriers/shippers should also focus on their safety and compliance to help them stand out.
Marquee Insurance Group proudly partners with freight brokers, load boards, and dispatchers. Check out our partners’ page or call us at (833) RING-MIG to learn more.
