In the complex business of goods transportation, shippers get exposed to many demanding situations and freight rates always remain as the greatest challenge confronted. Shipping industry is influenced by the vagaries of market conditions. As we all know, the freight rate is the price that is incurred for moving goods from one place to another. Generally, this rate takes in to account the type of cargo, its weight, mode of shipment, distance from pickup to delivery location and so forth. In order to manage freight rate expenditure, there are two different choices in pricing. Therefore, the trucking services are either based on spot rates or contract rates. Both the freight rate types offer its own advantages and disadvantages as we can infer that neither of the two would be better when compared to the other. More importantly, choosing between the two always depends on the frequency at which items are shipped and quantity of load the shippers want to transfer. We shall in this article look into both types of pricing alongside the differences between both the type of freight rates.
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What is Spot rate and Contract rate?
Before we move on to the difference between both spot and market rate, let’s see its nature and meaning.
Spot Market Rates
The spot market rate is the price offered by a shipping service provider at any given time for moving their freight from one place to another. Spot rates are usually determined by freight-to-truck ratio and always fluctuating in nature; available only for a short period of time. Also, decided by the market conditions existing at the time of requesting the quote for the movement of freight, spot rates are subjected to changes in supply and demand, often. An increase in demand directly increases the cost and a decrease in demand causes a decrease in cost as well. In addition to these, spot rates are influenced by the fuel prices too. They are available for the categories of services that include refrigerated shipping, full truckload (FTL) and less than truckload (LTL).
Contract rates are essentially based on the agreement made between shipper and the carrier company after taking into consideration the estimated volume of goods from a specific origin towards a specific destination. Usually, the trucking contract rates are based on the estimated volume of shipments agreed upon by shipper and carrier upon which the carrier company quotes rate per mile. This type of freight rate can be revoked, any time with the consent of either of the parties concerned.
Difference between Spot Market Rates and Trucking Contract rates
Based on certain considerations, both the freight types, spot as well as contracted rates are distinguished between each other.
Spot rates vary on the basis of supply and demand while contract rate is based on agreement between shipper and the transportation company and stays for an average period of three months. However, spot rate is available only for a short time for immediate movement of goods. Contract rate also varies, but it is not unpredictable or unsteady as compared to spot market rates. Even though contract rates are influenced by changes in the spot rates, it is not as variable as spot market rates.
Spot rate is considered ideal for last minute freight movements and also for small scale shippers who do not deal with heavy volume of goods that make it to contract rates. Infact, this type of freight rate is used by carriers in utilising backhaul truck space to avoid deadhead miles during the journey toward the starting point. While contract rates are used by large-scale shippers who arrange for regular load of goods in large volumes, every time. The benefits of spot freight rates are enjoyed by part-time shippers who do not have large shipments with not-so-frequent shipping.
Spot rates are determined based on the availability of capacity and the load volumes. Mostly takes in to account, the supply and demand for trucks in moving freight during a specified time with irregular load volumes. However, in trucking contract rates, the load volumes are consistent and requires regular movement of freights in regular intervals. Spot rates are characterized by matching a truck’s capacity with the load volume in a short time for immediate hauling whereas contract rates are entirely based on the terms of agreement made between both the shipper and carrier for moving freights and do not involve the demand and supply factors.
Price rate in spot market is always influenced by the market conditions based on the demand and supply. The freight capacity and rates are inversely proportional that if the volume of shipment is high and the truck capacity is also high, it reduces the price while a decrease in capacity for a given volume of goods makes the rates go up. While in trucking contract rates, the change in demand and supply poses hardly any effect. Contract rates are usually higher than spot rates, however in the long run it would prove very economical for shippers where high volume of commodities gets transported during frequent periods.
There are certain other factors also come into consideration while deciding both spot and contract rates such as type of goods- based on its value, the delivery time frame- for express transport the rate would be high, the weight- the heavier items are charged more and the vehicles used- specialised carriers. In addition to this, rates are also determined on the basis of head haul or backhaul. Black haul is more costly as carriers find it difficult to get return loads during their journey back towards the point where the haulage started in the first place.
Freight shipping services from Ianis Cargo
For any kind of shipment, be it LTL, FTL, express transport service, you can absolutely rely on the most trustworthy carrier among the shipping and courier service in Romania. Hand over your shipment to Ianis Cargo where transportation issues are addressed in a methodical manner to meet your business needs.
Striking the right balance between both the rates would be ideal for shippers. Always monitor the market situations and the rates to take advantage of the benefits, whichever is suitable. Before you ship, make sure to select the freight rate that would be ideal for your business situation. Like aforementioned, it is mostly based on the frequency of shipment and the volume of loads to be moved.
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