The freight market is a crucial component of the global supply chain, and the cost of shipping goods can have a significant impact on a company's bottom line. This is why determining which pricing model—spot market rates or contract rates—is the most cost-effective and worthwhile for your organization is important.
Spot market rates are prices negotiated on a shipment-by-shipment basis, while contract rates are agreed upon in advance for a specified period. Both have their advantages and drawbacks. The question is, which option is right for your business needs?
By understanding the nuances of spot market freight and contract rates, shippers can make informed decisions that optimize their supply chain costs and improve their overall competitiveness. In this article, we’re uncovering the differences between spot market freight and contract rates and examining the factors that can influence pricing in both models, such as supply and demand, fuel prices, and market volatility. Plus, keep reading to better understand which pricing model is best for your business.
Spot Freight Rates
As defined by Mercury Gate, “Spot rates are a form of short-term, transactional freight pricing that reflects the real-time balance of carrier supply and shipper demand in the market.” This pricing model is ideal for shippers with short-term shipping needs or those who want to take advantage of market conditions.
One of the primary advantages of spot market rates is that they allow shippers to quickly react to market changes and get competitive pricing. On the downside, spot market rates can be volatile and subject to sudden price fluctuations due to changing fuel prices and supply and demand.
For example, van spot rates have decreased -25.8% and flatbed spot rates decreased -21.1% from April 2022 to April 2023, according to DAT. To prove the volatility spot rates from month to month, take a look below at the average spot rates across vehicle types for the past four months:
- Van Spot Rate: $2.25
- Flatbed Spot Rate: $2.71
- Reefer Spot Rate: $2.60
- Van Spot Rate: $2.17
- Flatbed Spot Rate: $2.72
- Reefer Spot Rate: $2.51
- Van Spot Rate: $2.07
- Flatbed Spot Rate: $2.67
- Reefer Spot Rate: $2.41
- Van Spot Rate: $2.04
- Flatbed Spot Rate: $2.67
- Reefer Spot Rate: $2.37
Shippers opt for spot rates in the freight market for several reasons:
- When primary carriers are unable to cover a shipment, shippers turn to spot rates as an alternative.
- When an urgent, unforeseen shipment arises, they choose spot rates due to the speed of the pricing process.
- When contract pricing is impractical due to a lack of freight consistency and/or density, shippers find spot rates more suitable.
Contract Freight Rates
Contract rates are the rates that a shipping company agrees to pay for a predetermined period of time for specific shipping lanes. Many contract rates are established for 3, 6, 9, or 12 months. This pricing model is ideal for shippers with predictable shipping needs and who want to lock in pricing for a specific period—freight density and consistency are key!
Contract rates offer greater price stability, allowing shippers to budget more effectively. The best time to lock in a contract rate is when the costs per mile are low. On the other hand, contract rates can be inflexible and may not offer the best pricing during periods of market volatility.
For example, a beverage provider can agree to pay $1,500 per shipment for a period of 12 months for a specific shipping lane between Los Angeles and New York. This rate would remain fixed regardless of market changes, allowing the shipping company to optimize their budget and plan their costs for the duration of the contract.
The one problem that could occur is that shipping costs at this time could decrease. But since this beverage provider locked in their contract rate at a higher cost, the company cannot negotiate a lower price until their contract is up.
Shippers opt for contract rates in the freight market for several reasons:
- These rates offer more stable pricing, allowing for better budgeting and planning
- The ability to secure capacity for predictable shipping volumes and frequency
- Potential cost savings for high-volume shippers, as carriers may offer discounts for long-term commitments
- Improved carrier relationships, as contract rates can foster long-term partnerships
Choosing the Best Freight Market Option for Your Business
There are several factors to consider when choosing the best freight market pricing model for your business. To begin, it’s important to note the volume and frequency of your shipments. This is critical in determining whether spot market rates or contract rates are more suitable. For example, if your shipping needs are predictable and consistent, contract rates may be the better option. Yet, if your shipping needs are sporadic or unpredictable, spot market rates may be a better choice.
Other factors to consider when choosing which freight market option is best for your business include current market conditions, such as fuel prices, supply and demand, and market volatility. That’s why it’s common for shipping companies to use a strategic mix of contract and spot rates.
To negotiate the best rates with carriers, it's essential to have a clear understanding of your shipping needs and market conditions. By demonstrating your volume and frequency of shipments, you can negotiate more favorable rates with carriers, particularly if you're willing to commit to long-term contracts. Additionally, cultivating strong carrier relationships through consistent, reliable service can help secure better pricing and more flexible terms. Keep in mind, a skilled freight brokerage can help you negotiate these rates as well.
At the end of the day, choosing which freight market option—spot rates or contract rates—is best for you is… up to you! We recommend taking a hybrid approach to the freight market and leveraging contract rates and spot rates when a situation calls for one or the other.
LynnCo’s Freight Brokerage team can help you secure the best spot rates and contract rates. Reach out to us to get a quote!