Sticking to a strict budget and keeping transportation costs to a minimum are key factors for businesses needing to frequently move freight. We’re here to cover all aspects of two different pricing methods, spot rate and contract rate. Two, very different pricing strategies that work for different business needs. Helping you to understand how each of these structures works will help you to optimize your freight strategy and achieve an efficient supply chain. So, let’s get straight into it!

What Is A Spot Rate? 💰

A spot rate is a one-time fee quoted for the movement of a shipment. While taking, real time supply and demand, truck capacity, fuel prices, seasonal factors and other market conditions into account. These rates can fluctuate drastically depending on the current conditions. Spot rates are often used for shipments that are irregular, non frequent, shipments that require immediate transport or when a primary carrier cannot cover a shipment, so a different carrier steps in.

Pros Of Spot Rate 👍

1. Flexibility 

Spot rate works by allowing businesses to accommodate unexpected shipments and varying volumes without being tied to a contract. This then allows businesses to be operationally flexible by eliminating the need to plan and predict shipments in advance.

2. Potentially Save Money 

When demand is low, and truck capacity is high spot rates can be much more favorable to shippers and lower than you would usually find with a contract rate. Meaning there are opportunities for reduced shipping costs.

3. No Long-Term Commitment 

Avoid committing to long term agreements when your shipments are not consistent.

Cons Of Using Spot Rate 👎

While spot rate can work out extremely well in some cases, it must be considered that during peak seasons when truck capacity is low that these spot rates will significantly increase. Here are some points to consider about the drawbacks of spot rate.

1. Price Volatility

Due to the nature of how spot rates work, price volatility is a major drawback. Sometimes they can work in your favor, but other times as pricing moves with the market you could end up paying high rates. This makes budgeting difficult.

2. Truck Capacity Issues

With no contract in place, carriers are not liable to move your freight. Therefore, during busy periods when capacity is low you might find it difficult to source truck space. This could lead to serious delays in the movement of your goods.

3. Increased Admin Work

For a spot rate, you will want to shop around for the best quote possible. However, this can then become a time intensive job. The money you might save by getting a good spot rate might be over ridden by the cost of a staff member having to quote shop. Subsequently sacrificing time and resources.

What Is A Contract Rate? 📃

The name is pretty self explanatory. To sum it up, a contract rate is an agreement between a shipper and carrier that the shipper will commit to shipping a pre-determined volume of freight with a carrier regularly. In return the carrier will offer a contract with a highly competitive rate and will always have load capacity for this freight available. A win-win scenario!

So, like any other contract it’s a locked in price for a pre-determined period of time, usually between 3 and 12 months for the service of moving freight along a specific lane. Typically, the cost is set during an annual bid, which most call a tender. These contracts cover all aspects of the freight, including: type of freight, anticipated volumes, extra special equipment required, extra services needed, i.e. loading and unloading, and pick up and destination points.

Pros Of Contract Rate 👍

1. Better Budgeting 

With this model of pricing, your fixed costs are shielded from market volatility, leaving you with predictable pricing. This is great for accurate forecasting and budgeting.

2. Build A Real Partnership 

Instead of working with multiple carriers, perhaps like you would with spot rate you can build up a real, strong partnership when using the same carrier long-term. This can lead to better communication and also secure enhanced service reliability.

3. Guaranteed Capacity 

With a contract in place, your carrier is guaranteeing that they will have truck capacity for your freight. Meaning, your freight will be prioritized over new customers that maybe come to them for a spot rate, leading to less delays.

Cons Of Contract Rate 👎

1. Paying Over The Odds

If market prices drop, but you’re locked into a contract you will end up paying a higher rate.

2. Volume Commitments 

Forecasting volumes can be challenging, especially when you’re a business with fluctuating needs. Most carriers require a minimum volume to qualify for a contract rate. So it’s important to assess your shipping needs before committing.

Which One Should You Choose? 🤔

Both pricing structures have their rightful place in the freight world, as they’re both needed for different businesses needs and shipping patterns. Let’s recap when you would typically choose each one:

Spot Rate – A perfect option when your shipments are sporadic, or if you don’t mind gambling to take advantage of potential dips in price.

Contract Rate – On the contrary, this is a perfect option for regular shippers that want predictable costs.

But you don’t have to choose just one solution, why not consider a hybrid approach?

There’s always the option of locking in your regular shipments with contract rates and then for any other irregular or unexpected freight, use spot rates. This removes the pressures of trying to predict, unpredictable freight while also guaranteeing the capacity for regular freight at a predictable price.

How Can PEI Help? ❤️

If you still have any questions about either of these options, or you’re not sure which one will work best for your business, then get in touch. We’d love to help you to find a solution that will reduce your costs, keep your business agile while ensuring seamless shipping.

Phone: 888-SHIP-911 or use the link below!

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