Learn the latest trucking industry pricing strategies for spot rates and contract rates.
Having a firm grasp on the intricacies of pricing strategies is essential in the trucking industry. But is your business equipped to navigate the fluctuations of the spot market and employ successful strategies to secure profitable, long-term contract rates?
The transportation industry is still reeling from the aftershocks of the globally disruptive COVID-19 pandemic. But how exactly have these events reshaped the balance between spot and contract rates? And in a world where efficiency and adaptability are paramount, how can carriers leverage technology and forge robust partnerships to thrive in this new, competitive world?
In this article, we’ll answer some of the most pressing questions you may have concerning spot rates and contract rates – with help from Dean Croke, Principal Analyst at DAT Freight and Analytics. We’ll also explore how carriers can effectively navigate both current and future markets, whether they’re newcomers to the industry or seasoned players.
Spot rates, also called spot quotes, are the dynamic, flexible one-time fees that shippers pay to move a load at current market pricing. They’re determined by the interplay of supply and demand in the freight market and are akin to a barometer of the market’s current state. This means they fluctuate based on availability of loads and trucks at any given moment.
Typically, spot rates come into play after a shipper has exhausted options in their routing guide and reached out to their usual brokers or carriers. As a result, the freight available in the spot market is often considered less desirable. This underscores the importance of not solely relying on spot rates for sustainable business growth.
Navigating the constant fluctuation of spot rates can be challenging – that’s why it’s essential to ally with proficient lane rate data providers. Companies like Cargo Chief offer comprehensive and nuanced views of the market, enabling carriers to access real-time data to inform their decision-making process. Partnering with Cargo Chief or a similar lane rate data provider empowers you with the insights you need to capitalize on more lucrative opportunities in the spot market.
Load boards are like a digital crossroads where carriers and shippers converge. They play a crucial role in the spot rate ecosystem. Load boards like DAT and Truckstop act as incredibly beneficial partners that provide a huge range of information and opportunities for carriers. They enable access to a vital, flourishing hub of business with real-time snapshots of available loads. By utilizing their services, carriers can efficiently find and secure more profitable freight.
Contract rates in the trucking industry are part of long-term freight transportation agreements. They’re pre-negotiated, fixed prices set between shippers and carriers under agreements that span a considerable duration – often a year or more. Unlike spot rates, contract rates are more stable and predictable over time, allowing shippers and carriers alike to plan their operations with greater certainty.
For carriers, ensuring a consistent contract rate is part of a strategy that involves more than just offering competitive pricing. You’ll need to establish a reputation for reliability, consistency, and quality service.
First, you must build a strong track record. Success in obtaining contracts often depends on your history and reputation. Carriers must focus on delivering exceptional service, maintaining on-time deliveries, and ensuring cargo arrives safely every time. A solid track record can act as a persuasive argument in your contract negotiations.
Next, you need to demonstrate an understanding of shipper needs. Invest time in understanding the specific needs and challenges your potential shipping partners face. This may involve industry-specific requirements, seasonal volume changes, or particular expectations of service. Tailoring your services to meet these needs can set you apart from your competition.
Then, you must focus on your networking skills. Establishing and nurturing key relationships within the industry is critical for achieving your long-term goals. You can achieve this by attending networking events, joining industry associations, and through direct outreach to potential clients. Building these strong relationships leads to contract opportunities and referrals down the road.
You should also leverage technology and data whenever possible. With advanced Transport Management Systems (TMS) and data analytics, you can enhance your operational efficiency and reliability. If you demonstrate a commitment to technology and data-driven decision making, it’ll be more appealing to shippers looking for more sophisticated logistics partners.
You can think of spot rates like the stock market’s daily rises and falls. They reflect the immediate supply and demand dynamics of the market and are determined at the moment. By playing close attention to the spot market, you can find better pricing as a response to market changes – or be forced to pay more than you might have planned.
Contract rates tend to be influenced by broader market trends and are more insulated from sudden market shifts. This offers your company a buffer against volatility. When negotiated strategically, you can save a considerable amount of money in the long run as you’ll gain protection against price hikes due to unforeseen circumstances.
You’ll want to take advantage of spot rates for urgent, low-volume shipments. Carriers can capitalize on higher rates when the market is more buoyant. Contract rates are the better choice for regular, high-volume shipments and provide you with cost certainty and predictable revenue.
The traditional split between these two models has been significantly altered by recent global events. As Dean Croke of DAT said in an interview on the Semi-Related Podcast, “In normal times, the mix was about 90% contract and 10% spot, but during the pandemic it got to 75% contract and 25% spot.” He expects the mix will settle around 85% contract and 15% spot due to shippers using more spot services.
“Contract rates,” Croke continued, “which is 85% of the loads moved – they follow spot market rates by four to six months. So if spot rates have bottomed out and have been bottoming out for the last few months… long-term contract rates will start to bottom and increase on that four-to-six month lag.”
Croke's insights highlight the importance for carriers to not solely depend on spot market freight for sustainable growth. Building strong, lasting relationships with shippers and brokers, typically fostered through more stable contract rates, is crucial for maintaining a reliable revenue base and retaining drivers.
The prevailing trend in the logistics industry involves companies securing capacity on high-volume lanes to avoid disruptions and stabilize rates. Shippers have learned from pandemic-related changes and have formed stronger partnerships. Notably, 80% of lanes with lower volumes are being excluded from routing guides, with shippers opting for direct spot market engagement instead of formal RFP processes. This strategic shift reflects a more efficient and targeted use of resources in response to the evolving dynamics of the market.
Dean Croke provided more valuable insights into this trend. He noted that there was a substantial amount of freight spend on both contract and spot rates, with a significant concentration of volume on a limited number of lanes. He explained that big shippers have strategically locked in their capacity on these key lanes, which constitute about 20% of their total lanes but carry the bulk of their volume.
This strategy has involved some rate negotiations, with carriers accepting lower rates in exchange for a higher volume of shipments. This approach can be beneficial for carriers, since lower rates coupled with more volume can lead to more profitable revenue per truck week and more loaded miles.
While spot rates can offer opportunities, keep in mind that they often represent the freight that shippers couldn't allocate through their preferred channels. This can mean dealing with less predictable and potentially less profitable loads. Here are some strategies carriers can utilize to maximize their profitability when working within the spot market:
Whether your business capitalizes on the immediacy of spot rates or the stability of contract rates, you must be prepared to continuously adapt to market shifts while focusing on efficiency and reliability. If you work to embrace new technologies, foster sturdier relationships, and diversify your client base, you’ll be able to both withstand the ebbs and flows of the industry and drive your business toward sustained growth and profitability.
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