February 16, 2012
A better way to estimate the acquisition value (not the redemption value) of points and miles.
Last year I introduced the idea of Fair Trading Prices for points and miles. Fair Trading Prices are the prices people pay for points or miles using the best available common option. Often, for example, people effectively buy miles by putting spend on points earning credit cards. The values in the Fair Trading Prices chart are determined by assuming that when someone spends with a point/mile earning card, they are giving up 2 cents per dollar that they could have gotten by using a 2 percent cash back card. In other words, if you get 1 mile per dollar when using a credit card, you are effectively paying 2 cents for each mile.
Not redemption value
The Fair Trading Price is not an estimate of redemption value. If the chart says that the fair trading price for American Airlines miles is 1.56 cents, for example, this does not mean that you will get 1.56 cents of value from your miles when you redeem them. You may get much more value or you may get less. However, if you are thinking about buying miles, acquiring miles via a shopping portal, or even putting spend on a miles earning credit card, the fair trading price is a good number to use to estimate the worth of those miles.
A coupon book analogy
A good analogy is the Entertainment coupon book sold by Entertainment.com for about $30 each. The coupons in the book can potentially save you hundreds of dollars. Just as likely, though, the coupons can sit on a shelf unused until they expire. The coupon book’s redemption value depends on how you use it. The book’s fair trading price, however is about $30 (yes, you can get them cheaper – remember, this is just an example).
Now imagine that a store offered an Entertainment book as a bonus if you spend $100 in the store. Would you think of this as a $200 rebate because you know the coupons will save you that much money? Or, would you think of this as a $30 rebate? I think $30 is the right answer. But, is it a good deal for you? Yes if you want the coupon book and actually use it to save more than $30. No, if you are more likely to leave it on a shelf unused.
A real example
Recently Nordstrom offered 36 miles per dollar for purchases made through the British Airways shopping portal. In certain circumstances, British Airways Avios miles can be quite valuable. For example, a $300 short-haul flight can be had for 9000 miles round-trip. In that case, the Avios’ redemption value is 3.33 cents per mile. The current Fair Trading Price, though, for British Airways miles is 1.29 cents. So, when estimating the value of Nordstrom’s 36X promotion, should you use the possible 3.33 cent redemption value or the 1.29 cent fair trading price? I would argue that the fair trading price is the better answer. In that case, Nordstrom’s promotion was like a 46% rebate (1.29 cents X 36). Remember though, that just like a coupon book, this rebate is only a good deal for you if you really use the miles for valuable redemptions.
An estimate, not an answer
Since miles and points do not trade freely on an open market, it is impossible to come up with a perfect chart of fair trading prices. So, consider the values in the chart as estimates based on the best information I have at hand. The numbers in the chart will change over time as I learn more or as situations change. And, I welcome input from readers and bloggers. Even though there is no “right answer”, we can work together to make the answers better.
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