Understanding spot rates is essential to operate your business with the lowest possible costs, whether you’re a shipper or a carrier. Both spot and contract rates are important considerations when determining how to ship your goods or, for carriers, which shipping jobs to take. If you’re not familiar with spot rates, keep reading to get an overview of what they are, how they compare to contract rates, and why all of this should matter to you. If you’re a carrier looking to minimize your overhead, be sure to check out our current promotions on our used semi-trucks and trailers, so you can outfit your shipping fleet for the lowest cost possible.
What is a Spot Rate?
A spot rate is a one-time cost that shippers pay to a carrier for a single shipment. In essence, the shipper is paying for a one-off shipping job, and once that shipment is complete, the relationship between shipper and carrier is completed. The cost of a spot rate is based on current freight market pricing, which can fluctuate from week to week and throughout the year. For example, let’s look at the spot rates between May 23 and May 29, 2022:
- Up 13% week over week
- Down 8% month over month
- Up 10% year over year
All of these statistics matter, but they can be a bit confusing in this case since the trends all seem to point in different directions. To put it simply, these statistics show that demand for freight is fluctuating, and the spot rates for shipments are mirroring that uncertainty. However, the main takeaway from these statistics is that spot rates can change quite rapidly. Both shippers and carriers need to understand how these rates fit into their overall business plan and budget.
Benefits of Spot Rate Shipping
Generally speaking, spot rates are a good option for shippers with inconsistent spikes in volume for their shipments or whose shipments don’t follow a consistent schedule or route. So why would a shipper choose spot rates over contract rates? What are the benefits of these one-off shipments?
For example, let’s say that a company has a contract with a carrier for regular monthly shipments, but demand for their products spikes just before the holidays. Their contracted carrier would continue with the normal shipment volume when the holidays are over. This company might benefit from spot rate shipping, as they would be able to pay a carrier to handle the excess shipments without entering into a long-term contract.
Spot rates give shippers flexibility in their shipments to meet customer demands without drastically altering their shipping schedules and contracts. Spot rates are available not only for full truckloads but for less-than-truckload (LTL) shipping and can be used for dry van, flatbed, and refrigerated shipping.
Drawbacks of Spot Rate Shipping
Though they provide flexibility, spot rates are not a reliable business model for shippers. Spot rates do not provide accountability and security for businesses with regular freight needs. Business owners lose out on the opportunity to build relationships with their carriers, and because they don’t have a long-term contract, there is no guarantee that you will have a carrier for your next shipment.
As we stated, spot rates are impacted by fluctuations in supply and demand for carriers, which means you could end up paying much more for your shipments if you’re shipping during periods of high demand, such as near the holidays. Without a contract that secures your shipping rate, your costs can increase dramatically during these high-demand periods.
Should You Choose Spot Rate or Contract Shipping?
For both shippers and carriers, it is generally a good idea to utilize a mix of both spot rate and contract shipping. Contract shipping allows you to lock in a rate and create a long-term relationship with a business, which can be essential for networking. For shippers, it ensures that you have a carrier you can trust to deliver your shipments on a regular basis; for a carrier, it’s guaranteed income for an extended period of time, providing some financial stability for your business. Still, having the option of utilizing spot rate shipping in emergency situations offers flexibility for shippers and the opportunity for additional jobs for carriers.
Many shippers don’t realize that your contract rates can revert to spot rates if you don’t give the carrier enough lead time on your shipment. This is because, given short notice, a carrier will have to treat your shipment as an emergency, one-off shipment, which can leave you paying a higher spot rate despite having a contract with that carrier.
Whether you’re a shipper or a carrier, understanding spot rates and keeping them available as an option has many benefits. However, contract shipping should be your primary choice for moving shipments.
What Factors Affect Spot Rates?
Now that we have a good understanding of spot rates and how they compare to contract shipping rates, let’s talk a little about the factors that impact spot rates. As we’ve stated, spot rates fluctuate based on carrier supply and demand. In times of low carrier availability and high demand for carriers, spot rates go up; spot rates go down in times of high carrier availability and low demand for carriers. It’s the same supply-and-demand model that impacts the costs of just about everything on the market.
However, there are other factors that can impact the rates. These include fuel costs, driver availability, load-to-truck ratios, and O/D pairings. With the cost of fuel hitting record highs this year, carriers must build in these costs when creating bids for spot rate shipping.
Regardless of whether you’re a shipper or a carrier, it’s important to stay abreast of the constant changes to spot rates and understand how they impact your business. Keep in mind that there will be times that it is more beneficial to use spot rates, but in general, the stability provided by contract shipping is much preferred by both parties.
If you’re a carrier looking to add to your fleet so that you can provide more contract and spot rate shipping to customers, check out our inventory online or stop by an Arrow Truck Sales location near you.