A new customer recently asked one of our sales people the difference between spot and contract rates. We thought it was a great question, and one other people might have as well. Spot and contract rates are industry pricing terms. Keep reading to learn more as we discuss the differences and benefits of each.
The Difference Between a Spot Rate and a Contract Rate
A spot rate is a one-time price given by a freight service provider to move a product from one place to another. For example, a shipper might get a price from a carrier for a single 200-lb shipment on a specific date.
On the other hand, a contract rate is a price given by a carrier (typically negotiated through a third party logistics service provider) by which the carrier agrees to the same price for a set of shipping characteristics over a set period of time. For example, a shipper might get a price for from a single carrier for a 200-lb shipment each month for a term of 12 months.
Why Use a Spot Rate?
A spot rate is a good option when a shipper has a one-time shipment need, such as during times of high demand. This rate is typically based on the availability of shipping equipment at the current point of time, so it’s largely influenced by demand. For spot shipments during times of high demand, for example, the price may be significantly higher because demand is high and supply of transportation equipment is low. These numbers can shift depending on the time of day, day of the week, and week in the month.
Spot rates are great for emergency situations, but they can be significantly more expensive than shippers who choose a contract rate. Long-term agreements will take precedence in importance and cost because they’ve already been negotiated and agreed on when a spot rate is requested.
Why Use a Contract Rate?
A freight or LTL contract rate allows a shipper to negotiate an affordable rate over a long period of time, which ensures they will have the transportation equipment and resources necessary when they need a shipment. Contract rates are specifically beneficial for companies looking to maintain their bottom line and have a keen eye on their budget, since the price is locked in and the service intervals are expected by the carriers.
When to Use Spot or Contract Rates?
A company with heavy shipping volume will often use both contract rates for regular shipments and spot rates for emergencies. But, generally, there are three questions you should ask before making a decision: Will your shipments be impacted by the season? Can your business handle the price fluctuation? Does your contract rate guarantee capacity through the year without a general rate increase (GRI)?
The Amrate Advantage
Amrate is Amware’s cloud-based transportation management software (TMS). The Amrate platform offers pricing and shipping options from multiple carriers, allowing customers to receive shipping quotes based on their shipment’s parameters. Amrate customers can even load their own rates if they have negotiated carrier contract rates in place. For a firsthand look at Amrate, click below and start saving on LTL this year.