Cross-border logistics is a complex and dynamic industry with a lot of moving parts (literally). But, if we had to distill shipping down to a few key questions, they’d probably be “What’s the best way to get my freight from Point A to B to ensure a high level of service?” and “How much is it going to cost?”
Enter spot rates and contract rates. These two timeline-based pricing approaches are the pillars of your freight management and pricing strategies. If you understand them, you can make more effective and financially informed decisions about your freight.
So, what is a spot rate?
A spot rate (also known an “ad hoc” rate) is a one-time rate offered “on the spot” to move a single load. It’s a guaranteed rate, typically good for 30 days. Spot rates are subject to real-time fluctuations in the market and change from day-to-day. You’re riding the economic waves!
What is a contract rate?
A contract rate (also known as a “recurring” or “repeating” rate) is the fixed rate for a lane over a set period, usually a year, based on a minimum volume. Once you agree to a rate, market fluctuations won’t affect it. This will help you better understand your freight spend over time. You’ve secured a set price over the length of the contract, and you’re guaranteed capacity for your lanes.
But what influences these rates? And what should you consider when you receive a quote? That requires a little econ 101. (We promise it’ll be less challenging than learning freight’s economic predictors).
Spot rates: the supply and demand seesaw
The relationship between the number of loads on the market (demand) and trucks available to carry them (supply), influences both spot rates and contract rates. Contract rates reflect an average price. They account for the financial spikes, dips, and plateaus caused by changes in supply and demand over time. Spot rates on the other hand are based entirely on a snapshot of the market. Supply and demand on a given day determine whether your spot rate is high, low, or somewhere in the middle.
Think of this relationship as a seesaw. When market load volume is high, that means there are fewer trucks available for each load. You’re competing with a lot of other shippers, and carriers have more control over price. High spot rates are caused by increased load volume with low carrier capacity in a particular market. Conversely, low spot rates are caused by lowered load volume with high carrier capacity. Carriers in this market will lower prices (to a certain degree) to win business.
Contract rates: the “fuel surcharge” explained
Remember how we said contract rates are predictable? That’s true, but there’s one variable to keep in mind when you ship cross-border between the United States and Canada: fuel costs. Contract rates are broken out into two line items: a line-haul price and a fuel surcharge estimate. The line-haul price is consistent across every load on a given lane, but the fuel surcharge is an estimate and updated weekly based on the Department of Energy’s (DOE) current diesel price.
How to get the best rate
“Best” is relative when it comes to cross-border shipping. Spot rates and contract rates both have a place in your freight management approach depending on your volume, timeline, and other business attributes. Here are some general guidelines though that can point you in the right direction:
1. High volume? Let’s talk contract rates.
Volume is the most important factor in your spot versus contract rate decision. Contract rates are typically a better financial and service choice if you have high volume lanes. 3PL’s and carriers offer volume discounts because consistent lanes improve everyone’s financial forecasting and overall efficiency. As a shipper, you enjoy lower set costs as well as assured capacity with fewer carriers. You’ll get better service with consistent drivers who understand your facility, route, and border crossing protocol. Practice makes very close to perfect.
2. Low volume? Irregular shipments? In a pinch? Spot rates are your friend.
Spot rates are ideal for inconsistent or low volume lanes because they offer flexibility. They’re also a good safety net for those “Oh no” moments when you need a carrier promptly. While they’re less predictable than contract rates, that doesn’t automatically mean “more expensive”. You may pay less depending on the behavior of our trusty supply and demand seesaw!
It all comes down to quotes
Did we mention that logistics is complex? Throw in a border or two and finding the best rate can take a lot of time, phone calls, and headaches. Traditionally, a shipper either sources a carrier on their own or sends a broker an Excel spreadsheet of loads and lanes. The broker takes that information and begins sourcing capacity for each lane and negotiating prices on the back end. This process could take anywhere from two hours to two weeks, providing very little visibility.
Two weeks is…long. And while your inbox has almost infinite capacity, no one wants to spend hours upon hours hitting “reply all” on a long string of emails. Another option is to use SCOUT by Forager. This digital portal synthesizes the market data and carrier information that sets those spot and contract rates. Any registered user can log in and instantly request as many quotes as they want. Suddenly two days of emails and calls turns into 10 minutes. Getting started is easy, too.
So, you know what? We take that back. There is a “best” in cross-border shipping if we do say so ourselves. And with a little freight rate know-how and access to a comprehensive digital portal, you’ll be well on your way to a smooth (and affordable) cross-border experience.