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Thursday, November 22, 2012

The True Value of Points - Why the Experts Are Dead Wrong



The True Value of Miles – Why the “Experts” are Wrong

 

I really never understood why anyone would buy miles for their Frequent Flyer account.  If I could “earn” 1 mile per dollar spent on my credit card (or sometimes more), paying more than a penny per mile to purchase them never seemed to make economic sense. OK, I understand there might be times that you need to top off an account to purchase an award ticket that you would like to book NOW!But, to go to the airlines and say “I want to buy 50,000 miles” seems crazy to me! I don't care that you use it for aspirational award travel and can get 5 cents per mile for your 1st class seat.

I was reading one of my favorite blogs the other day. The author is one of the most respected Bloggers on the subject of points and miles.  He is widely considered to be an expert on the subject.  His blog has some great tips and he seems to really know how to work the system.  In this particular post he was touting this great American Airlines promotion to purchase miles.  He went through all the calculations in detail showing how the cost was just slightly more than 2 cents per mile.  He then said this is the lowest price he’d EVER seen from AA!  He did stop short and say that unless the price was about 10% less, even he still wouldn’t buy them.  That brings me to today’s point. 
 What are the TRUE value of miles and points? In reading several different travel blogs daily, there is a general consensus about which points are the most and least valuable and approximately how much each mile or point is worth in dollar value.  They all have different valuations for the various programs, but everyone seems to AGREE that Hilton points are among the LEAST valuable and that Ultimate Reward points from Chase, and Starpoints from American Express and Starwood hotels are among the MOST valuable. This becomes important when it comes to booking award travel.  You want to know should I use my points and miles, or should I pay with cash? (Well no one reading this would EVER pay anything with cash!)
 Universally among all the Bloggers is the concept of “my points are worth X cents each, and I need to use Y number of points, so X times Y = $Z.  Therefore using my points will cost Z dollars.  If the room charge or flight is more than Z dollars it makes sense to use points.  If the room charge or flight is less than Z dollars, it makes more sense to use cash.  Now it’s slightly more complicated than this because you have to factor in things like taxes, resort fees, etc.  You also have to factor in things like miles or points earned for the stay or flight if you pay cash.  Award stays and flights generally don’t earn stay credit or award miles toward status. 
 I believe that this kind of valuation is completely wrong!  Our parents taught us, and we have taught our children the value of a dollar.  We make purchasing decisions every day for small items and big ticket items based on intuitively what we know is the value of a dollar.  When it comes to points and miles, we aren’t quite so well versed in their value. 
 First of all, what is the value of a dollar?  It means vastly different things to different people.  To someone who has an 8-figure net worth $1 means very little.  To someone who just makes ends meet $1 is very valuable.  Something is only worth what someone else is willing to pay for it.  The ONLY reason something doesn’t sell is that the price is too high.  At some price everything will sell.  We see this all the time in real estate.  Someone puts their house on the market and it sits there for 60-90 days.  What does the realtor tell them to do?  Drop the price.  When the price drops to the point that someone is willing to pay, the house sells. That's what it was worth.  So how do we make these decisions about the value of something?  We subconsciously think to ourselves “how hard do I have to work to replace the dollars that I need to spend for the item I am purchasing”?  We make these decisions every day. Most of them are intuitive.  If the item costs a $2, you don’t think about that decision the same was as if the purchase price is $250,000. 
 OK, so how does this apply to points and miles? Let’s use an example.  You want to book a flight that costs $450, but you can only find an award seat for 50,000 miles.  so I use $450 from my bank account or do I use 50,000 miles from my FF account?  Let’s assume for this demonstration, it is last minute and you really need to book that flight right now.  Using the conventional method of valuation, it would probably be best to just pay dollars for the flight.  You would also earn miles for the flight toward status. Placing the standard valuation of 1 point per mile you would be “spending” $500 in miles. Points and miles are just like any other currency. You earn them, and you spend them.  The difference here is that you can only spend miles on limited forms of travel. In general, the longer you hold them, the less they are worth due to devaluation by the airlines.  Dollars on the other hand are a universal currency.  If we think of points and miles in the same way we view dollars, valuation takes on a different meaning.  How hard do I have to work to replace the miles or points I am about to spend?
 Let’s say that you have $5000 in your checking account and 50,000 miles in your frequent flyer account. If you purchase an award ticket with 50,000 miles, you still have $5000 in your checking account, an airline ticket and an empty FF account.  On the other hand, if you purchase the ticket, you will have $4500 in your checking account, an airline ticket and 52,500 miles in your FF account. (Let’s assume that you earned 2500 miles for the flight).
 
Now how hard to you have to work to recover those 50,000 miles or the $500?  I will leave the $500 portion of the question up to the reader. If I apply for a new credit card that has a 50,000 mile sign up bonus with a minimum spending requirement of $2500, I need to spend $2500 from my checking account to obtain those 50,000 miles.  What if I don’t need $2500 worth of stuff right now?  Here’s the simplicity of it all and why the “experts” are wrong.  If I purchase $2500 worth of VISA or MC gift cards with my new credit card, (assume each gift card costs $5) I will have met the minimum spending requirement and will have replaced the 50,000 miles in my account.  Now, what do I have left?  I have $2475 in my checking account ($5000-$2500 in gift cards -$25 fee for the cards).  But I still have $2500 in gift cards to spend.  Since gift cards are almost exactly the same as cash, I have really only "spent" $25 to obtain the 50,000 miles! By my calculation, that’s a cost of just under .05 cents per mile as you actually now have 52,500 miles in your account. As far as I can tell .05 cents per mile beats 2 cents per mile any day.  The airlines have to be laughing at us when we purchase miles like that!
 
As far as Hilton points being the least valuable, on a point per point basis, yes they are not worth the same as a Starwood or Ultimate Reward point.  I can however EARN Hilton points by the boatload!  I get 6X Hilton points per dollar on purchases at supermarkets and drug stores and 3X points on everyday spending.  With the new Bluebird card, I can purchase Vanilla Reload cards at CVS or Walgreens and earn them back at a very rapid rate.  Again the question comes down to, how hard do I have to work to earn back Hilton points?
 
In the end, we all have to be comfortable with the purchasing decisions that we make.  I would never pay cash for a hotel or airline ticket if I could earn back those points so easily.  Obviously this strategy will not always work as there are not always deals available when you need the points.  The points and miles don't post right away either.  There are times that paying for a flight or hotel room makes perfect sense.  We just have to make an informed decision about the true value of points and miles.
 
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About The Points Doctor

The Points Doctor is Bruce J. Wilderman DDS of Artistic Expressions Dentistry.Dr. Wilderman has a practice limited to Cosmetic Dentistry, serving patients of the Philadelphia Area since 1986.He and wife of 30 years enjoy traveling the world for little or no money with the points and miles they have earned from the credit card companies. Dr. Wilderman would love to teach you how to do the same. You may reach him at ThePointsDoctor@comcast.net

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