Contract Rates vs Spot Rates

Contract vs. Spot: Freight Rate Shipping Pricing Strategies

Posted on:
May 06, 2022

When it comes to planning your shipping budget, it’s easy to get confused over the principles of transportation pricing. Let us make it easier for you and help you decide on the best shipping rate.

What are the freight pricing options?

Due to the versatility of the freight shipping market, your transportation needs may often vary. Besides modifying the critical points of logistics planning, it also affects the approach to the pricing of shipping services. Your financial decisions form a network of potential carriers to work with and give a clear idea of your budget management.

Along with the rapid development of logistics industry innovations, shipping affordability remains a challenge for most businesses. Many retailers come up with the question of the optimal freight pricing model to ensure financial profits and avoid unwanted expenses. If you want your supply chain to stay cost-effective yet save quality delivery performance, it’s essential to understand the principles of contract and spot rates.

What are contract rates?

Contract rates type offers fixed pricing for transit services based on estimated freight volume and the cost the carrier sets per mile. By agreeing to ship your goods at a contract rate, you fix the price for delivering your goods on a particular route during a set period, typically a year. Such an option allows you to plan your company budget for longer time intervals and accord the freight amounts with the carriers’ regular capacity.

Using contract rates is beneficial if you want to maintain your shipping consistency and get some predictability of your logistics operations costs. It can help you create a standard pricing procedure for moving your items, eliminating the need to dig into every shipment’s organization. 

Also, the carriers who offer contract rates are more likely to become your long-term partners and provide you with better access to their capacity. 

What are spot rates?

Spot rates represent short-term pricing offers for uncovered or spontaneous shipments. If you need to deliver the goods due to the customer’s request but your regular carrier can’t provide the required capacity at the moment, getting a spot rate is a solution. Besides, spot rate carriers can handle your last-minute shipments and are suitable for taking occasional routes.

Spot rates can help you effectively react to the supply and demand shifts and arrange shipments on the spot when needed. It is particularly beneficial during the peak moving season when many orders emerge unexpectedly, and you cannot predict the demand with high accuracy. Sometimes, seasonal goods that don’t withstand long preservation can quickly reach consumers thanks to the spot market.

How to choose a suitable freight pricing type?

To determine a suitable freight pricing option, retailers need to consider the nature of their supply chain operations. It primarily depends on the popularity of your products which identifies how frequently and how much you ship. Also, it’s vital to take into account market fluctuations and correlate them with your future business goals.

Determine your shipping volumes and routes

Freight volume consistency is the number one factor influencing your pricing choice. Verify that you observe a stable demand throughout the year. Evaluating your usual transportation routes will help you see if you can trace a fixed scheme of your supply chain operations. It will prompt you to rely on the contact rates system. Thus, you’ll feel more confident about getting the required transport capacity without significant price changes.

However, your sales can be conditional on seasonality, meaning you don’t always need the same shipping capacity. Consider cooperating with carriers on spot rates if your business is rather dynamic. This market-regulated pricing gives you more freedom to deliver to various locations, even with lower supply. You can view spot rates as an opportunity to fill the gaps in customer demand. Whenever you experience a demand outbreak, you can book a shipment right away.

Analyze relationships with suppliers

The shipper/supplier relationships contribute to your financial decisions regarding transportation. The supply process runs smoothly with solid connections and allows you to better plan production or distribution. By keeping in touch with your vendor, you’ll be able to evaluate the freight volumes and verify all products are ready for shipment on time. Therefore, carriers will be more likely to agree on a contract rate with your company.

Being on good terms with your supplier can also prioritize your orders in situations of growing customer demand, particularly when unexpected. When it’s possible to stock materials and goods timely in case of emergency, you can proactively organize shipments on spot rates. In addition, an established partnership with the vendor can help you dodge common stock issues and prevent the shortage or surplus of the products.

Keep your supply chain flexible

There’s no doubt that every business aims to develop a consistent supply chain and collaborate with trusted carrier services. If dedicated shipping experience means a lot to you, it’s reasonable to apply demand forecasting and try to predict the order amounts in advance. It is how you’ll be able to start early planning activities and prepare for the following shipping season.

Sometimes, retailers refuse hot shipments due to their attachment to the contract rates functionality. However, you don’t need to exclude a freight pricing option when there’s a great chance to deliver your products to more customers or reach the new buyers’ audience. Spot rates effectively expand the consumers’ circle, so your main task is to tailor the rate choice depending on the shipment details.

GoShip can connect you to many professional carriers ready to deliver your goods at contract and spot rates. Enter the shipment information into our system, compare the real-time shipping prices, and get a free quote today!

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