Should Shippers Choose Contract Rates Over Spot Rates?
September 13, 2021 • 2 minutes read
Staff Content Writer
Understanding the difference between freight pricing options facilitates the growth of your business.
The transportation marketplace encounters challenges created by port congestion and lockdowns born by the unprecedented pandemic, which consequently impact global freight rates. During this chaos, should a shipper choose a spot rate over a contract rate or vice versa? Choosing the right pricing option enables you to manage your business more efficiently. Let’s look at the definitions of both rates!
Contract Rates vs. Spot Rates
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 over a set period of time. In most cases, contract rates are set for 1 year.
Establishing a contract with carriers does create stable pricing and service level expectations; however, in a short period of time, a shipper using contract rates could pay more than using spot rates.
Spot Rate is a one-time rate based on supply and demand, or shipment volume compared to available equipment. Due to the reliance on the market condition, spot rates fluctuate continually, sometimes even hourly.
Playing the spot market has similar characteristics to gambling, with upside gains when capacity is high and demand is low, which often makes shippers pay less in the short term. However, this kind of service agreement typically does not have well managed insurance, safety and financial reports due to inherently risky relationships.
So, should a shipper pick Contract Rates or Spot Rates?
If you have consistent shipments on consistent lanes, it’s normally better to use contract rates. With this type of rate, you’re locked in, securing the capacity you need with consistent rates.
If you have a low number of shipments, inconsistent loads and lanes, or a one-time need, it may make sense to use spot rates. With this type of rate, you are able to overcome any disruption in the supply chain by immediately filling gaps to get your freight moving.
Analyze your shipping patterns and goals and choose the best pricing option to benefit your business. GoFreight also provides real-time freight visibility and all-in-one software solutions for Freight Forwarders & NVOCCs of all sizes.
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