Contributed by Billy Forkey, Chief Executive Officer, Four Keys Logistics
The freight spot market for full truckload carriers can be challenging, especially in volatile times. However, there are effective strategies to navigate through these difficulties and achieve profitability.
By understanding the importance of the tools and data available to carriers, you can thrive in any market — even during downturns. In this article, we will explore two crucial tools that carriers can utilize: lane development and relationship-building. Then we’ll provide five more tips to help you manage your spot market loads, and project freight spot rates into 2024.
And when you’re finished reading, check out the other articles in our “Spot freight” series:
- What is spot freight?
- How to get the best spot freight rates
- Navigating the 2023-2024 freight spot market
What is a spot market in trucking?
The trucking spot market is an open marketplace for freight transport in which rates are negotiated ‘on the spot’ based on real-time load volume and carrier capacity market conditions.
The highly volatile spot freight market is typically used to handle shipments that don’t meet the terms of an existing freight agreement. As a result, they’re ineligible to receive contractually predefined rates. Examples include one-off lanes or freight that hasn’t been accepted by a routing guide carrier.
Companies often turn to the spot market when they have extra cargo or a sudden increase in demand, and need a truck on short notice. When a shipper has spot market loads to transport, they might post them on a spot market load board.
Carriers then bid for the job, and the shipper can choose the one that meets their requirements at the best price. The resulting price is known as the freight spot rate, and is a key feature of spot market trucking.
Trucking spot rates fluctuate based on a variety of factors, including the:
- Type and amount of goods
- Pickup and delivery locations
- Current supply and demand for trucks
However, it’s important to note that while the freight spot market can offer opportunities for cost savings when capacity is high, it can also result in higher costs during times of increased demand or reduced capacity. That’s why many shippers use a blend of contract and spot market freight, trying to balance security and flexibility.
Spot market lane development and relationship-building
The arguably most essential tools for successfully navigating the market fall into two categories: lane development and relationship building.
Lane development
Developing profitable lanes and operating them consistently is a fundamental aspect of navigating the spot market. By specializing in specific lanes, carriers can become experts in those areas, allowing them to maximize rates and efficiency. Additionally, repeatable lanes lead to increased visibility among customers, resulting in more freight opportunities.
Strong customer relationship-building
Providing reliable service fosters trust and credibility with brokers and shippers, leading to long-term partnerships. Building strong customer relationships has several advantages, including stability during market fluctuations, increased operational efficiency through familiarity with routes and loads, and the potential for scalability as customers offer more freight.
5 more tips for effectively navigating the spot market
Along with developing lanes and building strong relationships, follow these tips to manage your spot market loads as effectively as possible:
- Acknowledge market realities: The first step in navigating the spot market is acknowledging that you cannot change its current state. Market conditions fluctuate, and external factors are beyond your control. Instead of focusing on changing the market, concentrate on adapting your strategies to suit the prevailing conditions.
- Know your cost per mile: Understanding your cost per mile (CPM) is fundamental to running a successful trucking business. Ignorance of your operational costs can lead to financial losses and jeopardize your company’s sustainability. Track all expenses meticulously and calculate your CPM regularly to make informed business decisions.
- Beware of ‘cowboy trucking’: The allure of high-paying loads scattered across various markets may seem tempting, but taking the highest paying load on the board (which we refer to as ‘cowboy trucking’) is often unsustainable. Instead of building a steady rate per mile (RPM) and making accurate projections, cowboy truckers rely on end-of-trip calculations to determine their true RPM. This approach is not conducive to successful business operations or scaling.
- Maintain and respect the data: Keeping track of essential data is crucial for making informed decisions. Utilize cost-effective tools (even simple spreadsheets) to monitor your RPM, CPM, and other important metrics. Regularly review your progress and make small adjustments to optimize profits and efficiency.
- Partner with reliable brokers: Develop strong partnerships with reliable and reasonable brokers who value your services. Having a select group of preferred brokers ensures stable freight opportunities and shields carriers from drastic rate fluctuations.
Projecting spot market rates
The National Truckload Index serves as a critical benchmark for the trucking industry, especially for full truckload carriers operating in the U.S. Since its peak in January 2022, the index has undergone significant changes, experiencing a substantial decline of approximately $1.33 per mile, equivalent to a staggering 37% decrease.
This decline underscores the inherent volatility of the spot rate market and the challenges faced by carriers in recent times. Industry analysts predict that the second half of 2023 will bring further market corrections, with any substantial improvements not likely to materialize until sometime in 2024.
In a competitive market, reducing costs is a vital aspect of staying profitable. Consider the following cost-cutting measures:
- Seek fuel discounts from various providers
- Refinance equipment to reduce monthly overhead costs
- Reevaluate driver pay rates to align with current market standards
- Cut unnecessary subscriptions and expenses
- Learn basic maintenance skills to save on mechanic costs
- Assess staffing needs and downsize if necessary
Build a successful spot market strategy
While carriers cannot control the spot market, they have the power to navigate it effectively by employing strategic tools. Lane development and building strong customer relationships are paramount for success in any market condition.
Additionally, prudent cost-cutting measures and data tracking contribute to a resilient and thriving trucking business. By embracing these strategies, carriers can thrive and scale their companies even in down markets.
FAQ
The spot market refers to immediate, on-demand freight services with prices fluctuating based on real-time supply and demand. In contrast, contract freight involves pre-negotiated, long-term agreements between shippers and carriers, offering predictable costs and assured capacity but less flexibility.
Spot freight can be cheaper because its rates, known as spot rates, fluctuate based on real-time supply and demand, so when there’s high trucking capacity and lower demand, prices tend to drop. However, these rates can also spike during periods of high demand or limited capacity.
The profitability of freight can vary greatly depending on several factors such as the type of goods, distance, and market demand. Generally, specialized freight that requires specific equipment or certifications, like hazardous materials or oversized loads, tend to be more profitable due to less competition and higher rates.
About the contributor
Billy Forkey is the Chief Executive Officer and founder of Four Keys Logistics, LLC, which has provided data analytics software and consulting expertise to the trucking industry for the last 10 years.
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