Contract vs Spot Freight Broker: What You Need To Know

Contract and spot freight brokerages are distinctly different businesses. Contract brokering relies on stable, long-term relationships with shippers. Spot brokering, on the other hand, thrives on quick, real-time deals that capitalize on immediate market needs.

Choosing between these models is a defining step in your freight brokerage career. Your decision will shape your income, daily workload, and relationships with clients and carriers.

Drawing from insights shared by experienced brokers, our article explores these distinct models. We break down how they operate and help you evaluate which approach (or mix of both) best suits your business. Read on for the inside track on spot vs. contract freight.

Spot vs Contract Freight Brokers: Understanding the Differences?

While both operations serve essential roles in supply chains, they function in fundamentally different ways. Here’s a side-by-side comparison.

	Contract Freight	Spot Freight
Load Type	Repeat	One-off
Rates	Pre-negotiated	Based on prevailing market prices
Client Type	Long-term relationships	Clients may differ job-to-job
Barrier to Entry	Higher	Lower
Revenue Predictability	Stable and predictable	Less predictable
Technology and Tools	TMS, CRM (in bigger brokerages)	TMS, load boards, possibly CRM (bigger companies)

What is a Contract Freight Broker?

As a contract freight broker, you work with clients who have consistent, predictable shipments. They need their products moved on regular lanes for a known period.

Instead of negotiating each load individually, you sign a longer-term contract to fulfill their deliveries, ranging from 6 to 24 months. It commits you to handle a defined freight volume at set prices and meet certain service standards.

These are the defining characteristics:

• Fixed or indexed rates: Contract freight rates are pre-negotiated and locked in for the period. The goal is to provide cost predictability to your shipper and the carrier. Agreements may include a fuel surcharge clause, which allows for variations in response to fuel price changes.
• Fewer negotiations: Once the freight contract terms are inked, the bargaining is largely over. You can now focus on execution, ensuring capacity, professional communications, and great service.
• Ongoing relationships: This model is built on trust and partnership. As a collaborative partner, you come to understand your shipper’s unique needs. Good brokers aim to fulfill and even exceed their clients’ expectations. 
• Strategic planning: You can plan capacity and carrier assignments long in advance. This enables you to optimize scheduling and routes on your contracted lanes.

What is a Spot Freight Broker?

As a spot freight broker, you deal with individual, one-off shipments not covered by a longer-term contract. You work in a real-time marketplace, matching shippers who have immediate needs with available transporters. 

Here’s why the spot brokerage is like the rapid-response team of the logistics industry:

• Urgency is key: Spot loads usually need to be shipped as a priority, sometimes even within the same day.
• Market-driven pricing: Spot rates fluctuate based on current market conditions. Rates can shift hourly throughout any given day. Truck availability, demand levels, weather events, route closures, seasonal factors, fuel costs, and even time of day all influence pricing.
• Higher margin potential (with risks): Spot rates jump when there are fewer available trucks. This offers an opportunity to negotiate strong margins. However, a surplus of carriers means your bargaining power and margins weaken.
• Constant negotiation: Every load is a new negotiation. You have to be constantly at the top of your game. The key is bidding, countering, and securing margins that are healthy for your brokerage.
• Broad carrier network: Success in the spot market depends on a reliable, dynamic network of carriers. The means robust relationships you can leverage for priority service, guaranteed capacity, and favorable rates. 

Contract vs Spot Freight: The Pros and Cons

Each freight model presents unique benefits and challenges. Let’s take a deeper dive into the pros and cons.

Contract freight market

A contract broker typically enjoys the following benefits:

• Stable revenue: Long-term contracts provide a reliable flow of freight and more consistent income, which is desirable in any business. They enable better financial and operational planning and growth prospecting.
• Stronger shipper relationships: Consistently delivering on your promises boosts client loyalty and trust. The best brokers become a valued extension of their shippers’ logistics team, forging mutually rewarding long-term relationships.
• Strong contract carrier partnerships: Offering transporters regular loads strengthens the relationship. The resulting benefits include priority service, reserved capacity, and preferred rates.
• Predictable lanes and volumes: A clear understanding of your lanes and volumes allows you to plan strategically. It becomes easier to optimize routings and manage carriers efficiently.
• Reduced per-load negotiation: Once contract rates and terms are signed, there is less pressure to negotiate individual loads. This frees you to focus on higher-value activities (like landing new contracts!).
• Credibility and growth opportunities: Contract brokers typically enjoy a better reputation. A proven record of reliable performance helps to open doors to larger clients and richer opportunities.

Like with any business model, there are also a few downsides and challenges to consider:

• Less flexibility: Since you are committed to legal obligations for the contract term, you might miss other lucrative opportunities, like a specialized cargo job offering juicy profits.
• Risk of market shifts: If the market moves materially after rates are set, you or your carriers might find the contract less profitable than expected. Market disruptions include fuel price surges and falling carrier capacity.
• High initial barrier to entry: Shippers seeking a contract partner prefer brokerages with an established track record and strong carrier networks. It’s harder for new brokers to secure longer-term business.
• Performance demands: Maintaining long-term contracts demands consistent, high-quality service. Failure to perform at the defined level may jeopardize the relationship and future business.

Spot brokers

The benefits of operating in the spot market include:

• Higher margin potential: When truck capacity is tight or demand surges, spot rates rise. With an agile operation and skilled negotiation, you can win higher margins during this window.
• Better cash flow: Once a spot load is covered and delivered, you should receive payment fairly promptly. This keeps the cash flowing, which is lifeblood for new brokerages or those short on working capital.
• Market intelligence: Operating in the spot market requires a sharply tuned business antenna. You need to track real-time supply and demand, current rates, lane fluctuations, market trends, and more, which equips you with valuable business knowledge.
• Flexibility and agility: Without long-term obligations, you have greater flexibility to adapt to changing market conditions, shipper needs, or carrier availability. You’re free to pursue the best opportunities as they arise.
• Lower barrier to entry: It’s often easier to secure initial loads on the spot market. When shippers need a load moved fast, they want a broker who can execute. They’re less interested in contractual red tape.

The spot market also presents these downsides:

• High unpredictability: Just as rates can go up, they can also fall. Revenue forecasting becomes more challenging, and cash flow is less certain.
• Competition: The spot market is a competitive arena. Constant competition drives rates down and squeezes your margins. 
• Less secure income: Without recurring freight, you’re constantly prospecting for the next load. This can be stressful, especially if you don’t have a diversified portfolio or a financial buffer.
• Higher effort per load: Each spot load is a new negotiation with shippers and carriers. Compared to contract deals, you spend more time and effort per load, stretching your bandwidth.
• Challenges building relationships: Spot operators conveniently solve immediate problems. However, the transactional nature of the business makes it harder to build long-term partnerships with shippers.  

Can You Combine Contract and Spot Rate Operations?

The good news is that you don’t have to choose one model exclusively. Many brokers successfully blend contract and spot freight to create a balanced, resilient business. When well managed, a hybrid approach brings flexibility, scalability, and greater financial security.

It’s a smart move to balance income stability with growth opportunities, especially for new brokers. Spot freight can help you get in the door. Contract freight helps you stay in business long-term.

The most successful brokers work both sides of the street. When contract rates are less attractive, they lean more on spot. When the spot market is soft, their contracts provide stability.

How to Choose the Right Freight Broker Model

The right strategy for your business depends on your experience, goals, preferences, resources, and risk appetite. Here are 7 factors to consider:

1. Shipper network: If you have existing relationships with shippers offering regular loads, contract pricing is worth considering. Without a strong shipper network, spot freight is usually a more viable route.
2. Marketing skills: If you’re a natural at outreach and sales, the spot market offers a quicker entry point.
3. Carrier network: Whether it’s spot or contract, a strong, reliable carrier network is gold. Your goal is to have primary and backup carriers on speed dial.
4. Capital for technology: Both models benefit from smart technology, especially spot. Managing numerous spot loads effectively relies heavily on a good Transportation Management System (TMS).
5. Financial runway:  If you have a decent financial cushion and thrive on dynamic challenges, the spot market might be your ideal lane.
6. Personal preference and risk tolerance: If savvy negotiations, keen problem solving, and high-risk/high-return excite you, the spot market’s daily challenges can be thrilling. If you prefer stability, relationship nurturing, and lower financial risk, contract rates are a better option.
7. Team size: A solo broker can certainly handle both lanes, but larger volumes in either model (especially spot) will eventually require sales and operational support.

As discussed, a hybrid model promises the best of both worlds. It’s certainly worth considering.

What does a hybrid freight strategy look like?

While there’s no single “right” strategy, a hybrid strategy might look like this:

• 90% spot freight in the beginning. You focus on quick-turn loads to build relationships and revenue.
• Gradual shift to 60/40 or even 50/50. As you gain trust with repeat clients, some may offer dedicated lanes or long-term opportunities involving contract rates. This blend makes your brokerage more resilient to market fluctuations.
• Use spot freight strategically. Even experienced brokers use spot loads to fill capacity gaps, test new markets, or take advantage of rate spikes.

FAQs

1. Can I build a successful brokerage business with just spot freight?

You can certainly build a successful brokerage working solely in the spot market, especially in high-volume or niche areas. That said, many brokers pursue contract freight or a hybrid approach to stabilize revenue and build long-term value.

2. Which rate is higher between spot and contract rates?

Spot rates are usually higher than contract rates, especially in tight markets. However, they’re also more volatile.Contract rates offer stability over time, but they tend to be lower than spot prices during high-demand periods.

3. How do I ask for a contract rate increase?

Meeting your financial goals may require negotiating a better contract. Here are 5 tips for securing a rate increase:

1. Be able to justify your request: Have a solid reason for seeking the increase.
2. Arm yourself with evidence: Make sure you have the necessary evidence (e.g., cost data) to support your case.
3. Know what you’re asking for: Be sure about your position and communicate it clearly.
4. Time the discussions smartly: Choose an appropriate time to initiate the discussions (e.g., after you’ve impressed the client by going the extra mile).
5. Use leverage sensitively: If you have leverage, use it tactfully. Forcing the other party’s hand can sour the relationship.

4. What factors would you consider before negotiating contracts or rates?

When entering a negotiation, consider the following factors:

• Your goals and priorities
• The other party’s needs and expectations
• Current market conditions and benchmarks
• The negotiation strategy and approach
• Legal and ethical boundaries
• Risks and potential upsides

Final Thoughts

Whether you choose to focus on contract freight, spot freight, or a blend of both, success comes down to strategy, relationships, adaptability, and learning.

If you’re ready to build or scale a profitable freight brokerage, you’ll greatly benefit from our90-Day Freight Broker Course. This comprehensive training program (featuring text, audio, and video content) provides an invaluable resource, especially for newer brokers.

Join the program today and get exciting step-by-step guidance from industry pros who want to see you succeed.

Sources:

1. Freight contract vs spot rates, what’s the difference?
2. Compare spot and contract rates and identify trends
3. Spot vs. Contract Rates: The Difference in Truckload Shipping
4. The freight contract market vs spot rate market: Which is best for my business?
5. Spot vs. Contract Freight: How to Choose – Penske Logistics
6. The Best Freight Broker Training Online

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