Travel Rewards Credit Cards

Oct 26

How Much Is A Point Worth? First, Weigh Your Opportunity Cost.

One of the most frequent questions that I get is about whether a customer should use points or cash to “buy” an airline ticket, hotel room, etc. It’s usually along the lines of, “This ticket on Delta/American/United from New York to Los Angeles will cost $800 or 60,000 miles. At that rate, the miles are worth 1.33 cents each, right? Which one should I do?” That’s close, but not quite. By paying for the ticket, you are “using” 64,000 miles, not 60. How is that? Simple: A customer without elite status earns five miles per dollar spent, so not only are you spending 60,000 miles to get an award but you are also giving up the 4,000 miles that you would have earned if you had paid for it.

Opportunity Cost

opportunity cost

Which road should you take? As usual, it depends.

The 4,000 miles above can be attributed to opportunity cost, one of the “hidden costs” of using points. Think of opportunity cost (OC) as the benefits you surrender from the road not taken. Flying Spirit? That’s fine, but you surrender the Delta miles that you would have earned otherwise. Booking a hotel at a discount site? You may not get your points and benefits from the hotel because you didn’t book it directly through them (and they probably have a price guarantee, anyway). Etc.

Redemptions offer a similar phenomenon. How many times have you read a headline, “I took a $20,000 flight for 120,000 miles and $29 in taxes!” or something similar? That’s pretty impressive! Spending 120,000 miles for a flight that costs $20,000 means that you got a whopping 17 cents per miles worth of value.

The problem is, that analysis is wrong. Would you have actually spent $20,000 to buy that ticket if you had to do so out of pocket? Probably not, unless you were using other people’s money. What would you have paid? If the answer is “nothing, I wouldn’t have gone on the trip,” well, that’s how much value you got from the miles, excluding the psychic benefits that you would have received from visiting the destination. Your actual redemption value would be based on what you would have been willing to pay for that ticket, and that number is different for everyone.

Bottom Line: Enjoy your miles and feel free to brag about all the fun places you went and the survey you got. Just be sure to value them correctly.

 

 

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1 comment

    • Scott on October 26, 2017 at 8:13 pm
    • Reply

    There is no comparable value then if each person arbitrarily decides what the value is. One person loves Disney world so would pay more to fly to Orlando then the next person who has to fly there to see family at the holidays. First person says they would pay a thousand second says they would pay one hundred. That offers nothing of value in any comparison just boring opinion.

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