As the logistics industry continuously evolves, so do the pricing structures available to shippers today. Choosing the best pricing model for your shipping needs has a significant impact on your bottom line, which is why it’s important to explore all your available pricing options to ensure your unique business goals are met. Here at Spot, we recognize that one solution doesn’t fit all. Therefore, to help guide you in your search for the pricing structure that’s the right choice for your supply chain operations, the following outlines the pricing options that Spot offers: spot pricing, contract rates, & single-source.
Spot pricing is when a load needs to be urgently moved, usually within 1-3 days. These loads tend to be inconsistent, often changing in volume, shipping times, and various destinations. Generally, spot pricing is when unexpected circumstances come up or even one-time opportunities. Spot pricing is not always ideal for shippers because it can cost more. These rates are determined by supply and demand, which has been tight since the onset of Covid-19 last year. If you are looking to garner spot pricing, it is often acquired through last-minute phone calls and e-mails.
When requesting a spot quote, be sure to include accurate details, such as:
- Origin and destination zip codes
- Freight class and NMFC code
- Pickup and delivery dates
- Commodity type and dimensions of each packaged commodity
- Equipment type
- Cargo value
- Product weight
- Any other special requirements or attributes
If you roughly estimate your shipment’s details, you may end up paying for it later. This is especially true with nonstandard requirements or if you exclude any exact pickup and delivery times. The more time you can give yourself to get quotes and lock in pricing, the more likely you are to get better rates. Spot quotes generally go up in cost as the pickup date draws closer.
Getting up-to-date market rates is always essential because quotes won’t be the same from week to week. In fact, spot rates can change from hour to hour. Another tip is to schedule pickup and delivery times during regular business hours and especially not on holidays.
Contract rates are based on an agreement between a shipper and a transportation provider to move an estimated volume of freight from specific origin and destination points. In most cases, contract rates can be the best value and an effective way to garner stable pricing in the freight market. Typically, these contract rates are set during an annual bid but can be set quarterly or monthly as well. Contract pricing is normally agreed upon during the last quarter of the year and into the New Year. They are usually year-long contracts since the freight market can greatly shift. Recently, many smaller shippers have opted to use contract rates to help protect themselves from market swings, which can increase rates and tender rejections.
When a bid is sent out for contract rates, the lane will be awarded to the shipper based on three key things:
How do you know if contract pricing is right for your shipping needs?
- Do you consistently ship one lane or even from one origin point?
- Do you have an accurate estimate of your load volume on that lane?
- Do you know your time frames?
If you can answer yes to all of these questions, then contract pricing might be the best pricing model for your business, but don’t forget to explore single-source pricing.
Piecing together several logistics management tools and companies can be a nightmare, but having a single-source provider for all of your logistic needs can save you time, money, and frustration. That’s where single-source pricing comes in!
Single-source pricing is generally where you will experience the deepest discounts because you only use one company to move all of your freight. This type of contract establishes an entirely different type of relationship; it creates a partnership instead of needing to use numerous different vendors.
With a single-source partnership, the carrier tends to be more dedicated with a commitment to quality, on-time delivery, inventory, reporting, and customer satisfaction. This kind of pricing benefits shippers and carriers because it can help with predictability.
An honest 3PL company will engage in single-source pricing instead of shorter-term strategies that create the highest return. Here at Spot, one of our core values is that “we are more than just a broker”, and we ultimately aim to become an extension of your supply chain.
Most shippers use a blend of all three types of these pricing models, but it is best to use contract and single-source pricing when possible. According to McKinsey & Company1, below is the estimated contract mix of pricing models used:
- Full Truckload:
- Spot – 30-40%
- Shorter contracts (1-3 months) – 5-15%
- Longer-term contracts (3 or more months) – 50-60%
- Less than Truckload:
- Spot – 25-35%
- Shorter contracts (1-3 months) – 25-35%
- Longer-term contracts (3 or more months) – 30-50%
When choosing the best pricing model, the idea is to find the best mutually beneficial scenario. McKinsey & Company states, “Logistics companies that transform their pricing could increase revenue by two to four percent, translating to as much as a 30 to 60 percent increase in operating profit.”1
Other Factors to Consider…
When you are trying to decide on the best pricing option, keep in mind the following:
- Company Size – If your company doesn’t have the manpower to forecast future loads or have enough lead time to work out dedicated lanes, you need to consider that.
- Time – Long-term planning is usually ideal, but spot pricing would make more sense if you have urgent deadlines.
- Partnerships – Larger brand shippers tend to have more partnerships, leading to longer contract or single-source pricing commitments.
- Technology – Every shipper needs a centralized way to track and store supply chain data. 90% of shippers use digital platforms, such as a TMS, as a procurement tool. Click here to learn more about Red TMS, our proprietary software platform, that can be used to manage RFP data.
You may also use the following table as a resource when considering the best pricing option for your business.
Once again, we recognize that one pricing solution does not fit all, and ultimately the goal is to create a successful partnership between brokers, carriers, and shippers. If you’re ready to see what type of pricing your freight qualifies for, contact us today to discuss these options in more detail.