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Spot Rate vs Contract Rates

Spot Rate vs Contract Rates

Should a Shipper choose a Spot rate over Contracted Rates?

Posted: September 21, 2020 |

The transportation marketplace faces challenges created by the uncertain economy born by unprecedented world events. During this volatility, should a Shipper choose a Spot rate over Contracted Rates, or vice versa? Below, we will weigh in and provide pros and cons of each pricing method and guide the Shippers onto the best path.

First, what does it mean when it’s a Spot Rate or a Contract Rate? 

  • Contract Rate is the rate a motor carrier, freight broker or logistics service provider (LSP) agrees to use when moving a shipper's freight for a set lane and its freight characteristics over a set period of time. In most cases, contract rates are set for one year.
  • Spot Rate is a price a carrier 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.

Contract vs spot pricing decisions must be well thought out as any decision will directly impact a company’s bottom line.  The challenge is that Shippers are tasked with finding the best pricing while meeting the high-level services demanded by their customers.  Low spot rates will lead to tender rejections and missed pick-ups while paying a premium will erode profits. To ease the effect of this roller-coaster is securing capacity and pricing through contracts with service level KPIs.  This method ensures reliable service at a reasonable price.  

In a down marketplace, like the early phase of COVID-19, a Shipper can ride the roller coaster down to bare minimum rates with carriers lining up for these loads.

So, both methods offer solutions that address the shipper’s need to move freight to a destination. However, which one is best for you? Understanding when to employ each method is critical in optimizing cost and service.  

So, what are the advantages and disadvantages of each method?

 

Advantages:

Contract rates

  • Establishing a contract with a transportation provider creates stable pricing and service level expectations
  • Transportation providers can reserve capacity on the lanes you have on contract
    will be protected when capacity is tight.
  • Consignees and transportation providers can work on efficiencies as this will be a regular lane.
  • Over the long-term a shipper will pay a much higher spot rate than if they had chosen contract rates.

Spot Rates

  • Playing the spot market has similar characteristics to gambling, with upside gains when capacity is high, and demand is low.

 

Disadvantages:

Contract rates

  • In a short period, horizon, a Shipper could pay more

Spot Rates

  • Playing the spot market has similar characteristics to gambling, with potential great losses when capacity is high, and demand is low.
  • Hidden operational execution costs of time and money are incurred when having to spot a lane over 3 to 5 carriers for every shipment and having to establish a short-term relationship to move the freight.
  • Spot relationships lack accountability, as the carriers used within a given freight lane will be fluid with each shipment.
  • The shipper is constantly tied to capacity decisions driven by the lack of a long-term service agreements.
  • Over the long-term a shipper will pay a much higher spot rate than if they had chosen contract rates.
  • Inherently risky relationships, as service agreements are typically not well managed on insurance, safety and financial fronts in a spot freight rate transaction.

 

So, should a Shipper pick Contracted Rates or Spot Rates?

Each Shipper has a unique set of requirements.  The first step is to analyze the shipping patterns and goals and design a program that harnesses the benefits of both programs.  CPC offers a free assessment and will determine a strategy that fits your needs. CPC will assist shippers to find carriers who are eager for new business as we negotiate service contracts and lock them into an agreement that holds them accountable to fixed pricing and a superior service level.  To reveal these opportunities, CPC is ready to assist you and save you money today.

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