Yes, You DID Get 10 Cents Per Mile for Your Award Redemption

Since I’ll be starting a “real” job on Monday, I’d like to introduce Julian, who has agreed to help out by writing a new weekly series. Every Thursday morning he’ll take the position of the Devil’s Advocate and argue a contrarian view on travel and loyalty programs. I think it will be a lot of fun and hope you’ll share your opinions in the comments.  –Scott
 

As this is the first post of this series, let’s take a moment to explain what the heck it is we’re doing here. According to Wikipedia (which means we’ve all agreed it’s true and therefore it must be) the position of Devil’s Advocate originated with the Catholic Church during the process of canonizing saints. The Devil’s Advocate was tasked with arguing why a particular person didn’t deserve to be a saint. Their job was to take a skeptical view, to look for holes in the evidence. (The church’s office of Devil’s Advocate was abolished in 1983, likely because the guy who had to do the job was tired of everyone rolling their eyes whenever he started to speak and never getting invited to any Congregation of Rites after-parties.)

But nowadays the term refers to someone who takes an alternative position from the accepted norm, usually in an effort to engage debate. Sometimes the Devil’s Advocate might truly believe in the counterargument. Other times he might take the opposing position just to see if the original argument holds water. But he’s always arguing the contrarian view.

That’s exactly what we’re going to do here each week. We’ll take a common piece of wisdom that’s generally accepted by the points and miles community and argue the opposite view. Along the way, we might find some of the conventional wisdom is correct. We might find some of it was correct at one point but has lost its validity over time. And we might find some of it is just plain wrong. Hopefully we’ll at least have some fun discussions in the process.

So where do we start? How about with this one…

Conventional Wisdom says when you redeem miles for travel, especially in first or business, you can’t calculate your redemption value based on the actual ticket price.

Here’s the logic behind this: if you needed to buy a ticket from, say, Chicago to Frankfurt and you’re not a movie star or having your trip paid for by your employer Googapplesoft, you’d likely opt to pay somewhat less than $10,000. You’d sit in premium economy or maybe even (gulp) economy, pay $853, and just suck up the fact that you weren’t eating caviar in a lie-flat seat for 9 straight hours.

OK. So what?

“Well,” the conventional wisdomers explain, “if you use miles to get a first class seat on that trip, you have to calculate your redemption value at what you would have spent instead of what you actually got. Or at the ticket’s value to you. Or some average of something or other.”

Really?

Let’s look at this using an analogy. Say you were in the market for a new car because you regularly need to get from Point A (home) to Point B (work). You’re looking at a nice $20,000 Hyundai because they’re sensible and reliable and you’ve moved into that period of your life where sensible and reliable is more important than trying to pay $500 for your buddy’s old VW Bug with a converted lawn mower engine.

But you suddenly discover that Delta, to make up for years of forcing the world to use their dysfunctional online award calendar, is launching a fantastic promo. You can use SkyMiles to get a Porsche 911. And the redemption rate is unbelievable – you can get that $100,000 Porsche for just 1 million miles! That’s a redemption of 10 cents per mile! You quickly head over to the dealership and drive home in your brand new Porsche.

Except when you get home, you admit to yourself that you didn’t really need the Porsche. You would never spend $100,000 on a car if you had to pay cash. You would have bought that Hyundai for $20,000. So you decide you only got 2 cents per mile for your redemption.

Do you see the problem with that logic?

You didn’t get a Hyundai. You got a Porsche.

The tangible good you received sells in the actual course of commerce at $100,000. It’s not a pretend price – they sell Porsches for that much. People or companies who can afford it willingly pay it. In our free market society, that’s what it’s worth.

So why would it be any different with your first class ticket?

The Devil’s Advocate says the ticket’s “value to you” or “what you would have done” shouldn’t have anything to do with your redemption valuation.

“No, no, no,” interrupt the conventional wisdomers. “You’re talking about a car. That’s a physical item you get to keep. Airfare is intangible. You can’t resell it.”

It doesn’t matter. Transportation is a service. Economic theory considers goods and services parts of the same continuum. Premium prices are charged for high-end services the same way they’re charged for high-end goods.

“OK, fine, Mr. Advocate,” the conventional wisdomers grumble. “What about this? You can’t claim full value for your redemption because you made compromises in your travel plans to get that redemption. Maybe you had to make an extra stop or adjust your travel dates. If you had paid cash, you could have taken a direct flight on the exact day you wanted.”

This argument assumes people paying cash never make compromises based on price and availability. Except everyone does. When you go online to buy a ticket, you’re presented with a variety of flights and corresponding prices that differ based on demand. There might be a 5am flight that costs $200 less than the 11am flight. But you don’t want to get up at the crack of dawn, so you pay the extra $200. Since you could have taken the 5am, do you value the cash you spent at $200 less because you received better service than was absolutely necessary to get from Point A to Point B? Or if you take the 5am, is your cash now valued at $200 more?

“Aha!” The conventional wisdomers now jump out of their seats. “But you can’t compare cash to miles, noob! Cash is infinitely more flexible. You can’t turn your 1,000,000 miles into $100,000, buy your precious Hyundai, and use the extra $80,000 in cash somewhere else. Your miles have to be used for travel.”

True, but that has nothing to do with redemption valuation. That’s currency valuation. When you choose to collect miles instead of cash back, you’re making a conscious choice to forgo 2% in infinitely flexible cash for much more restrictive miles. Why would anyone do that? Because if used properly, miles can give you a lot more bang for your buck. That $10,000 first class ticket would require $500,000 in credit card spend at 2% cash back, but only $110,000 at 2x United/UR miles. You’re trading flexibility for power right at the beginning when you decide to collect miles instead of cash. So why would you have to factor that tradeoff into your valuation again at the end after you’ve already redeemed for a first class ticket that you know for a fact will work in your schedule?

Perhaps one could argue there’s a difference between valuing miles at what you received versus what you saved. That assumes people use their miles exclusively to replace cash. If that’s you, then fair enough. But a great many people use miles to take trips and have experiences they would never be able to afford with cash under any circumstances. The experience isn’t just the destination. It’s the journey as well.

And isn’t that what the miles and points game is all about?

Julian plays the Devil’s Advocate every Thursday with a unique perspective on travel loyalty programs and the points and miles community. He encourages a healthy (and respectful!) debate here or via Twitter at @dvlsadvcate.

  • Scott from MileValue

    You should value a trip at what you value a trip (or what it costs if that’s less than your value.) Excuse the tautology, but I think it’s still more illuminating than the points in this post.

    “Conventional wisdomers” shoot down your car analogy in this very post, and as an economics major I don’t understand your counter-argument at all:

    “It doesn’t matter. Transportation is a service. Economic theory considers goods and services parts of the same continuum. Premium prices are charged for high-end services the same way they’re charged for high-end goods.”

    • Julian

      Hi Scott. I know you’ve created a system on your blog that deals with this question. But I’d argue what you objectively value a trip at has to be what you paid for it in whatever currency you chose to use. If I only value a ticket at $1 why would I pay $500 for it? Because I either have to or want to get somewhere and there are no better options? Then I obviously value it higher than $1. We’ve all agreed to use certain currencies in our society and we know from experience their relative values, so when we pay for our goods or services, we’re agreeing to that price and that valuation. Otherwise we simply find another option.

      • WB

        I think you missed Scott’s point. I can certainly “afford,” in the economic sense, a $10000 first class ticket. I don’t PAY $10k, because it’s not worth that much to me. I might pay, let’s say, $3000 for that same ticket. But airlines are nor perfectly price discriminatory, so there’s no way for me to buy that ticket. I’m either paying $853 in economy or $10k for F. (or $5k for J. Whatever.)

        This is why your reference to “trips and have experiences [people] would never be able to afford with cash” misses the mark. It’s not that I can’t “afford” those trips, but that my willingness to pay is less than the airline’s willingness to accept. But at least in theory my value is my WTP ($3k for F, let’s say). So the value I got from the redemption MUST be a function of my WTP. If the value I get from the redemption is $10k, then the flight was worth $10k to me, and I should have paid for it. It’s only because the flight is NOT worth $10k to me that I used miles. You can’t say “I wouldn’t pay $10k” and then say “but it’s valued at $10k.” (This leaves aside the potential incongruity between WTP and ability to pay but then so does virtually all of mainstream economic theory.)

        To take another example, I often use Avios on short hop economy flights. There, my 4500 miles are truly saving me the cash cost of the economy ticket, because I HAVE to go to that wedding (or whatever) and without miles I would have to shell out cash. My value WTP is at least the value of the ticket, so your method of using value of the ticket to calculate CPM makes more sense.

        Actually in this regard I often have to rent cars and Hertz gives me some great value, since I live in a city. A one day rental might cost me $100+, and I can redeem 550 points for that rental, truly getting me 20 CPP.

        • disqust101

          What anyone would pay vs. what it costs is irrelevant – and is a specious argument. You want a $100K Porsche? Then cough up the cash. You want F, then you pay for it. Unfortunately, I can’t redeem Membership Rewards for the Porsche but I can for that seat in the front. In such a case, miles are functionally equivalent to cash and the “value” is the same.

          • Julian

            The idea that there might be a difference between a trip that you have to take versus one you want to take is interesting, but only before the moment when you actually purchase a ticket using either cash or miles, which is what we’re referring to when we talk about redemption valuation. At that point they’re functionally equivalent since you made the choice to pay the offered price. You may have decided you preferred to pay 220,000 miles instead of $10,000 cash, but that doesn’t make the ticket worth less than $10,000. It just means you paid with a different currency. If you paid 7,200 Euros for the ticket, it’s still worth $10,000 US and you would be getting $1.38 in value for every €1, which is the exchange rate today.

          • WB

            The point was not trips I want to take vs. trips I have to take. It’s what the numerator is when calculating CPM. When I am going to buy a cash ticket AT THE LIST PRICE, then, and only then, is it appropriate to use the list price of the ticket as the numerator in the CPM analysis.

            You are saying “use $10k for F because that’s the price.” But if it’s ‘worth’ $10k, then you should be willing to pay $10k. If your WTP isn’t $10k, then you can’t use $10k as the numerator. You’re saying “I wouldn’t pay $10k because it’s not worth* $10k, but I will value it at $10k because it’s worth $10k.” That doesn’t hold up.

            *”No,” you say, “it’s ‘worth’ $10k, but *I* would never pay that much.” Well, why not? It MUST be because you don’t subjectively value it at $10k. Otherwise, you’re saying, “I will pay $5000 for you to give me $10,000.” Well, okay, but that’s not really how markets generally work…

          • disqust101

            We are in agreement. Whether you pay in cash or miles for that F seat, the value is the same (one F seat). What currency you use is irrelevant to determining value as they are functionaly equivalent at the moment of purchase.

  • http://www.doctorofcredit.com/ doctorofcredit

    You can’t resell award tickets. Assuming the Porsche 911 couldn’t be resold, the analogy would hold true. I hope a bit more thought is put into the rest of this series.

    • Julian

      I did cover that point about resale in the post. Economic theory holds that salable goods and non-resellable services are simply two points on the same continuum. You can’t resell any high end service, no matter whether it’s bought with points or cash, but that doesn’t mean people don’t pay lots of money for them or that they’re not worth what people pay.

  • Tim2

    Let me start by saying I like the idea. The problem I see is you are playing both the conventional wisdomer AND the devils advocate. Wouldn’t it be better if you actually debated someone instead of use common things a conventional wisdomer would say in the senerio you set up. You presenting a valid argument, but then you yourself play the conventional wisdomer. My 0.02 debate someone out post your view without rebuttal ( from yourself) and argue in the comments.

    • Julian

      Hi Tim. That’s what this comments area is for, right? If people disagree or feel I didn’t argue their side correctly, they can come here and tell me why and we can enthusiastically debate.

    • Scottrick

      It’s a tricky situation. If the Devil’s Advocate ignores the opposing view, he leaves himself open to attack. If he considers it and makes a preemptive rebuttal, then he exposes weakness (if any) in his own argument.

  • Darth Chocolate

    When one makes a decision to redeem an award or purchase the fare outright the essential question is “what does this cost me?”. That could either be cash (for a purchase) or the amount of extra flying one would have to do to replenish the miles one spent on the award.

    If you are “miles rich, cash poor”, you may very well opt to redeem based on your need (perceived or real) to travel. For a “normal” person (i.e., one who does not churn cards for a living) you have spent time accumulating miles and if you had gotten the miles through business travel (with someone else paying for it), you need to balance how much additional flying time it would take to replenish your hoard.

    Bottom line is that yes, we would like to get good value, but we do not sweat the details of whether you are benefiting at 1.52 versus 1.53 cents/mile. It is just not worth it. We get our value from having spent the time in the air in the first place and then reaping the rewards.

    Over the past year I have redeemed 9 40,000 point awards on Delta; 8 went to family members. I earn more miles than I can use due to job-related travel (tomorrow I leave for the 3rd of 5 trips to France scheduled for the year, and my employer flys me in Business class). This first world problem will become more acute next year when I expect to earn over 600K miles on Long Haul Business travel.

    • Julian

      Thanks for being part of the discussion. I think your comment adds to the idea that miles and cash are different currencies with different inherent valuations, and you can choose to collect and use them in different ways. If you have excess miles, you might use them over cash to purchase your ticket and vice versa. But the manner of service and transportation has a free market cash value that I think is fair to use as a base redemption value if one is interested in comparing “what they got” in different currencies. (And I’ll be happy to help you with your excess mile problem next year!)

      • Darth Chocolate

        But that is the beauty. Each person values miles based on what they are worth to them. Sure they have a value – the airline values them one way and each consumer values according to their own enlightened self interest.

        For example, if I have the miles for a flight (say 40,000) and the cost of that flight would be $150, I may conclude that there is more value to me to spend the $150 than to “pay” the 40K miles. If cash were tight, I may spend the miles.

        Where it breaks down is when the buyer desires a Business Class ticket for miles only and is not willing to pay for even a discounted Business Class ticket. Then there is a “real” cash value to the redemption, and it probably goes to the least expensive cash option the buyer was not willing to spend.

        To illustrate, if a discounted Business ticket was $7000 and the non-discounted Business ticket on the same plane was $10,000 then I would argue the true value of the miles is no more than $7000. However, if the most someone were willing to pay cash for the same flight was $500, then the value of the miles would be $6,500 – the cash difference between what he was and was not willing to pay.

    • shay peleg

      Please tell me you redeemed everything at low

      • Darth Chocolate

        I simply went and booked the ticket. No secrets. Being a PM helped, I’m sure.

  • Joseph Cellieur

    Here’s the deal. Use Miles and Points as “bonuses” for things you would of had to pay for anyway and NOT actual currency. And you’ll never have a problem. People run into problems when they are trying to actually calculate it in as if miles and points are actual currency. They aren’t but if you would have had to spend that money anyway in the ordinary course of business and you can get something extra on top of it. Well then by all means. It’s like the market. Bulls and bears make $. Pigs get slaughtered.

    And people who over the top ( I make this mistake myself) expect to be able to use their rewards in every situation, only create unnecessary stress. Don’t go if you can’t pay for it. Extra bonus perks. And you’ll never be disappointed,

    • shay peleg

      I think the whole idea is to use points for trips you could have never have afforded no?

      • Julian

        I think for the majority of people who collect miles, you’re exactly right — they’re dreaming of an exotic vacation they couldn’t take any other way. And for those folks, redemption values don’t really matter. But for the hard core collectors of miles who have a large number at their disposal, redemption values are a good way to determine the “worth” of those miles when they do get used.

        • Joseph Cellieur

          Ok going to do something I never do which just proves I’m getting old. Once you start getting into this type of analysis what immediately occurs to me is you become a direct competitor of the supplier of the product themselves. For instance, if you can book a seat at XYZ and you have this “replacement” currency ( we’ll call it that for now) at your disposal which can also “buy” that seat, then it’s only natural for the first seller of the product to see you as competition. Which is fine if that’s the game you want to play, only problem is always remember you’re playing in an arena where your competitor always holds the upper hand and has been educated to 1) Never negotiate and 2) if you must negotiate always do it from a position of strength.

  • shay peleg

    A real job? are you crazy

    • Scottrick

      Maybe. But I’m looking forward to an opportunity to learn some new skills.

      • LTL

        Don’t lie, you just want work to pay for business trips so you can earn free EQMs. :-P

        • Scottrick

          The most amusing question during my interview process was, “Would you be okay if we asked you to drop everything and fly to San Diego next week to meet with a client?”

  • Christine Urban

    I thoroughly enjoyed this article, and I agree that both sides should be discussed in the context of the post. Got me thinking this morning, and I have to say that I personally agree with the Devil’s Advocate. Keep ‘em coming!

    • Julian

      Thanks, Christine. Glad to get people thinking, whether they agree or not!

  • KSS

    Great idea and great post. I love your writing style. Keep ‘em coming!

  • Victor C

    I think the other piece perspective missing from this discussion is the viewpoint of relative value to the how the points were acquired as a value/no value proposition as opposed to what one would pay or would not pay.

    For instance, if I use manufactured spending to “create” 70,000 UR points, transfer them to SKYPASS and take a one way first class flight form LA to Sao Paolo and it costs me $840 in the 14 months (assuming no bonuses) it takes to MS those points, and the time taken out to do so could not be used for a better, money making, purpose than would it not make sense to judge the value I’m getting not on the cost of the ticket were I to buy it, but on the value of the ticket I’m getting for the price, $840 (excluding taxes and fees) that I’m actually paying?

    Additionally, when taken more broadly over the realm of credit card applications, yearly fees, and manufactured spending; shouldn’t I judge the value I’m getting (tickets, rooms, etc.) by what it cost me to acquire the points, not by what I would be willing to pay for the points acquire, since that was the point in acquiring the points in the first place as opposed to using cash?

    • Julian

      Good point, Victor, and one I thought about myself. What you’re referring to is acquisition costs, which is separate from redemption value but certainly important. To have a complete overall valuation system, you’d absolutely want to include your costs of acquiring each mile, and ideally you’d also want to account for your time spent in acquiring them. But in this post I wanted to specifically focus on redemption side valuations since that’s where people often suggest it shouldn’t be a direct cash-to-miles comparison and where I think there’s room for debate on that position.

  • http://saverocity.com/bighabitat Big Habitat

    I have to go with the conventional wisdom here. Published first / business class fares are often priced so that people who don’t care about their budget (rich or corporate) will pay a huge premium. When they don’t, they give them away through upgrades. Adjacent seats can vary 5x in price depending on when they are sold. It’s more like a $10k bottle of wine at a restaurant that’s already been opened. Most people won’t value it at 10k even if some will, you could buy the same thing for 3k elsewhere, and tomorrow its worthless. Some people will pay that premium for the wine, but won’t convince the others they got 10k of value, although they might concede its a step up from their usual $7 bottles.

    • disqust101

      Your argument is irrelevant. If two people both want same item/service at same time, it doesnt matter what currency they use – both are equivalent.

      • http://saverocity.com/bighabitat Big Habitat

        And what if seats are offered for $10k but the cabin fills up completely with people using 100k miles? That would indicate the value is likely not $10k but is worth (at least) 100k miles and they are not equivalent. If individuals could resell tickets it would eliminate that arbitrage, but since you can’t the currency does matter and there are effectively two prices. To look at it from the other side, if you had already planned to use miles and you could pick any flight that day for the same amount of miles, do you really care what the sales price on each flight is? Would you redeem the miles for a less convenient flight just because the sales price was higher? Are you getting more value for a less convenient flight? If not then there is some disconnect between redemption value and the cost of the ticket.

        • disqust101

          What currency you use is (again) irrelevant. I can use 10K USD or 3.9MM ZWD or 100K XYZ miles. They are all of equivalent value as they all buy the same seat.

  • Rene

    However much you would be willing to pay for the first class ticket is the value you should use in your cpm. If you wouldn’t pay $10,000 then you’re inflating your cpm. How much you would actually pay for it would be a more accurate number to use. For example perhaps you wouldn’t buy a porsche for $100,000, but you’d think pretty hard about it for $50,000 (assuming you can’t resell it).

  • Dad

    I’ve been arguing with Scott for a long time. It will be interesting to see how well you do. Next time you argue points versus money, how about using Bitcoin instead of Dollars?

  • Marriott Marty

    My miles. IST far more than some peoples and I am a split user, I need to go to Belgium every summer to visit family, so if I used miles for coach then it would be a cash equivalent. I also went to Japan first class over Christmas vacation, an unnecessary trip.

    It is difficult to cal late the time I spend reading blogs and manufacturing spend. Versus how much more I would make actually working! But I enjoy the game! How many hobbies save you money!

  • Marty

    I agree with the Devil’s Advocate. Forget the car however … price the miles at the cost of the flight taken. IOW if a business class ticket costs $6000 or 120K miles, the “price” of each mile used is 5 cents. Forget the “value” component (generally defined as an estimate) of what you would have paid – because you can’t pay that amount and get the same seat! It’s why we collect miles. It they didn’t provide a product at an affordable price, we’d all be better off with a cash-back card.

  • http://www.jeffalytics.com/ Jeffsauer

    I loved this post – hope the devils advocate keeps on bringing this level of post each week. For me it comes down to the fact that I would gladly pay 2x ticket price to fly high class but not 5x. But since 5x is what it would cost, I think it’s fair to use that as the value. Conventional wisdom doesn’t seem to value what I personally value.

  • Artpen100

    I think different people make different value judgements on this, but I apply the DA’s logic to my personal decision making on transatlantic travel. Real life example: upcoming trip to Europe. My company pays for economy, upgrades are on me. Economy is $1267. Business is $6753. IF I can get an upgrade (I have not got the ticket yet, and upgradeable at booking class currently only exists on the return), it would be 20k miles each way. I am not a youngster, I have a bad back, and have little intention of sitting in economy if I can possibly swing it. That comes out to 13.7 cents per mile. Sure, if Business were priced at $3k-$4k rather than close to 7k (as it has in the past), I would also consider just buying business with cash (as I did once last year), which comes out to 6.8 cents per mile, but this year, I don’t think that is going to happen. If just paying cash, the choice is 6753 or sitting in economy . As an in between solution, a simllar flight on a different airline for refundable economy (instantly upgradeable with miles for elites) is about $4k and 35k miles (which comes out to 7.8 cents per mile). I’ve done that, too, and still considered it the better option over flying economy.
    Maybe another way to put it is that if flying business is of high value to you, and your main way to upgrade is to use miles, then miles will be high value as well. Which is why I save my miles only for long-haul upgrades, and don’t use them for domestic economy flights, gift cards or the like.

  • R A Rosier

    Ever seen a retailer advertise a 70% off sale? Off what, you ask? Exactly!

    Many state governments have rules on what retailers can use as a reference price. A retailer cannot lawfully claim that an item has a regular price of $5,000 unless they can demonstrate a majority of their sales occur at that price. If, the majority of their sales occur at the discounted price of $200, then that becomes their new “regular” price and if they advertise the item a 70% off they’d better be prepared to either sell if for $60 or depend their regular price assertion in court.

    Accordingly, although an airline may sell a few first class seats at $10k, if most of them are “traded/sold” for far less (e.g. 100k miles) then $10k cannot lawfully be used as their “regular” price.

  • WB

    I missed your reply but since you offered the last word, I’ll take it!

    I think we are arguing past each other, and your comment “220,000 miles is only equivalent to $5000 in cash” is the key. I had to go to a wedding. The cash ticket in economy was $700. I redeemed 25,000 miles and got 2.8 CPM.

    Think of it like opportunity cost: I’m foregoing ($700) by redeeming miles. So the equivalence is $700 = 25000 miles = 2.8 CPM.

    Now I recently flew to Asia using 160k pre-devaluation UA miles, in F. That F ticket costs, let’s say, $15k. But if I didn’t have miles (the ‘opportunity cost’ foregone alternative) is flying J (because I have the money, I dont’ like Y, etc., but I prefer not to pay for F). So I can’t value the ticket at 9.375 CPM, because that’s not an accurate measure — the foregone opportunity to pay for a ticket, under these facts and circumstances, would not have cost me $15k, but (let’s say) $5k. So a more accurate CPM is about 3.1 CPM, not 9.4 CPM. Note that this has nothing to do with how flexible cash is as a currency. I have the cash to pay $15k, but I don’t want to, because it’s not worth it to me to pay 10,000 marginal dollars for the experience of F. (I might pay $2-3k, but that isn’t an option.)

    The numerator of the CPM calculation has to be the actual alternative you’re foregoing by using miles, or, possibly (as I described above) your subjective maximum WTP for the product you purchased with miles. But one’s subject valuation of miles rarely should be the same as list price — unless you are actually, subjectively, willing to pay that much money in cash. (Which many people are not, as evidenced by the fact that most people who HAVE $15k are not spending it on longhaul F tickets.)