Today, more and more companies are in a dilemma because they do not know what to choose between spot rates and contract rates. It seems to be a hard choice, but, in fact, it is not. You just have to take into consideration all the details of each one and to learn some secrets. We will discuss about these two types of rates and about the advantages and disadvantages that they bring to the table. We hope that you will have a better perspective of them at the end of this article and that it will be easier for you to make a decision.
First of all, the spot rate, or the “spot price”, is the immediate value settled for a given service. When we talk about shipping services, it is based on the value of that specific lane at the moment of the shipping quote. Spot rates are influenced by some specific factors which affect the entire process. Spot rates depend on how much shippers are willing to pay and how much transport carriers are willing to accept. Also, current and future market value has a huge impact on the result. It is very common to see rates go up and down depending on the supply and demand. Let’s take for example a retail chain that needs to haul 100 truckloads from San Jose, CA to Lexington, KY in one week. They come in and offer twice the market rate to carriers, just to have their merchandise hauled and have it in store as soon as possible. All of the sudden you have 100 less trucks in San Jose, but 100 more trucks in Lexington, KY. The supply of trucks in San Jose goes down, while the supply of trucks in Lexington, KY goes up. It is very obvious that the price in San Jose will go up and those trucks stuck in Lexington, KY would haul anything just to get out of there.
Secondly, the contract rate is a price reduction applied to customers. However, in terms of shipping, it means a smaller shipping rate offered by a transport carrier for a longer period of time, in exchange for certain commitment from the shipper. The contract rates are a little bit (or more) different and they can be seen as a strategy which is usually implemented when the competition is high and the companies must differentiate their freight services. Contracts usually bring sales personnel to the table with persuasive and closing skills. This kind of rates usually happen at a corporate level and, most of the time, whenever a salesperson is hand in hand with a corporate decision maker. In most cases elements like driver fatigue, driver shortage, stringent legislation, and maintenance fees are not taken into consideration. If we go more in depth and talk about flatbed trailer services, RGNs, step-decks, we can see that all the extra work that has to be done (tarping, chaining, strapping) cannot be quantified in a contract. Some loads are secured in as little as 10 minutes, other take more than four hours which affects driver fatigue and driving time.
At last, that we defined both terms, allow us to do a comparison. Although contract rates may seem very appealing for both shippers and carriers, spot rates will always take prevalence. It will always be someone to disrupt or disturb even the best written contract agreements. Whether we are talking about drivers going independent, salespersons switching companies for better payouts, or financial advisors throwing some revolutionary theories, everybody involved in the shipping business is there to make money out of it. In an ideal world, contract rates would make life easier for everyone involved in the industry, but we do live in a practical world which requires maybe more than ever a very sought skill: adaptability. Being able to adapt gives you an edge over your competitor whether you are behind the wheel or not. On the other hand, having locked in an agreement, gives you that peace of mind that all of us seek naturally. It is a lot more convenient to go about your day without thinking about the demand for transportation services, the availability of truckload capacity, or the seasonal variation.
To summarize, we think spot rates and contract rates are both beneficial and disruptive at the same time for the industry. If you are unsure, we can only throw in an advice: go with what suits you better at any given time. There are times when spot rates are a win-win situation for both shippers and carriers and there are times when everyone is happy at the end of the day after signing a contract, so try finding a balance. The major difference appears when you chose to go exclusively with one option. While dealing with spot rates exclusively is very stressful and nerve wrecking, basing your business on contract rates only is the “safest” road to bankruptcy.