Spot market rates and contract rates are two common terms in the trucking industry. They represent two different ways of securing rates and loads in order to generate revenue. As we'll discuss, each rate comes with distinct pros and cons, and specifically a trade-off between pay and stability.
Let's first look at the definition of each.
A Spot Market Rate is the rate to move a load from A to B at the moment or in the very near future. Spot market rates fluctuate constantly based on supply and demand. Rates go up when supply is low (few trucks available) and demand is high (many loads to be hauled). Conversely, rates go down when supply is high (many trucks available) and demand is low (few loads to be hauled). Depending on market conditions - the speed at which manufacturers produce goods and drivers are available to haul loads - these rate changes can occur many times throughout a single day.
A Contract Rate, or often commonly called a Dedicated Lane, is the rate to move a predetermined number of loads of freight from A to B over a predetermined period of time. It's typical that a contract's terms are for a period of up to a year. The contract is an agreement between a shipper and a carrier, and all of the details - especially the rate - gets locked in at the time that it is arranged and signed. Therefore, the rate is not subject to fluctuation based on the market over the length of the contract. Shippers and carriers often prefer this type of arrangement because it makes business planning easier and more predictable.
But what do these types of rates mean for you as the driver, and how can you gross the most possible revenue on your hauls? As we'll see, both spot markets and dedicated lanes offer distinct pros and cons.
Spot Market: Less Stability at a Higher pay
The bigger factors of both types of rates are dependability on the market conditions, schedule and route preferences, and amount of effort it takes to find your next load.
More dependence on market conditions
As a spot driver, your income is dependent upon the market. This means that it fluctuates based on the relationship between the supply of truck drivers and the demand for freight to be moved. Hauling spot loads gives drivers the opportunity to capitalize on rate fluctuations. In general, spot freight will pay more than dedicated/contract, but there are times that the market softens and spot rates dip below contract rates as spot carriers fight for loads. Some drivers can take advantage of higher rates, and find ways to secure the best loads possible. Especially now with the market experiencing a much higher demand (freight) than the supply (truck drivers), there is potential for drivers to earn a higher profit.
High spot markets attract more O/Os into the business and motivate those to expand their business, potentially by purchasing extra equipment and earning a higher profit. Low spot rates can also have the opposite effect and drive people from the trucking life in search of steadier income.
Extra effort to find your next load
Being a spot driver typically means that you can only secure one load from A to B at a time. You likely don't know what your next load will be, and just as it did for the load you're on now, it takes work to line up the next. This includes the backhaul. Some drivers get lucky and find that they're able to take advantage of a high backhaul rate. But the time and effort spent searching for and securing loads certainly does not go unnoticed.
Less predictability and stability
Depending on the rates and loads available, the terms of your hauls may or may not be within your favor and preferences for things like routes, schedules, and type of freight. Sometimes, you may just need to take what is available in order to keep earning revenue. There are trade offs in everything, and balancing rates with your preferences is no different.
Dedicated Lanes: More Stability at a Lower Pay
Many of the pros of the spot market become cons of dedicated lanes, and vice versa.
Less dependence on market conditions
Dedicated lanes are favorable to some drivers as your rate per mile is determined and planned out ahead of time. Especially as we know that the market is unpredictable and can flip any time, some drivers fear the risk and the unknown involved with the spot market. It's important to note that carriers will typically need to commit to rates that are below current spot rates in order to secure a contract, trading profit for increased security.
More stability and predictability
When you're running a dedicated lane, your routes are predictable. The security in knowing that you’re protected against any market dips and can still generate enough to cover your costs, is highly valuable. You can rely on the same amount of pay each week. You can also discover and rely on your regular truck stops and favorite meals, and become familiar with traffic patterns, road conditions, loading and unloading processes, and more. The predictability of it can certainly help bring some extra peace of mind while on the road, especially when as drivers, you deal with so many uncontrollable factors in trucking every day.
Higher ability to factor in your preferences
Drivers find a higher ability to factor in their preferences for routes, schedules, and loads with contract routes and dedicated lanes. Depending on the carrier, they may already have dedicated lanes established with brokers and suppliers. Talk to them about how to navigate this space for the highest chance of getting the loads of your choice.
Determining your cost-per-mile and preferences
Whether you secure loads through the spot market or dedicated lanes, it's essential that you can make enough to cover your expenses. Take the time to calculate your expenses with our Cost-Per-Mile calculator. This will help you determine whether it's best to play more in the spot rate market or try to secure some dedicated lanes.
Additionally, every fleet is made up of a variety of different types of drivers. Some drivers like to roam the open road and see different sights every day. Others prefer the routine of visiting the same places over and over. If you work as an O/O for a fleet that welcomes your preferences in the loads you haul -- like TrueNorth -- be sure to share your voice! This will give you the best chances of getting matched with the types of hauls you prefer, and an overall better experience on the road.
Brokers are known to have access to consistent freight, and therefore, volumes on dedicated lanes. They are increasingly trying to find ways to contract lanes with carriers. Just as you as the driver want stability in your income, brokers want stability in their costs. Developing strong relationships with brokers is one way to be considered for those lanes. Or, if you self-dispatch and want to improve your negotiating skills to access the best freight brokers and shippers have to offer, you can ask your carrier to support you with a script to start those conversations. TrueNorth is here to support you in this, and every way.
The Best of Both Worlds
Of course, the rate that drivers earn per mile truly depends on so many factors - the market conditions, amount of effort put into finding loads, driver preferences, and more. Just because a driver can earn a higher rate in the spot market does not make it a guarantee. It all depends. This unpredictability can bring both excitement and fear.
According to our Owner-Ops, one of the best ways to maximize your profits by playing contract and spot is to secure a contract from A to B and then find a spot on backhaul. This would enable you to have the stability to cover your expenses through your haul from A to B, and take advantage of higher rates from B back to A! However, like everything, you need to figure out what will work for you, and then go after it in every way possible.
In trucking, being able to make enough revenue to not only cover your costs, but exceed them, and therefore take home a higher pay, is possible. And having some peace of mind on the road is absolutely worth it.
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