The Value of a Point

A few weeks ago, I was talking to a friend on Twitter and we were talking about point values. Evaluating points is a very subjective topic, as many people assign different values to their points. People have their favorite points and assign more value to these points more than others, myself included. In assigning values to points, we only look at the value we receive for that point. What if that isn’t the best option?

My Typical Points Evaluation:

Although my view point of this is changing, I do assign values to my point currency. My current point valuations are:

• Ultimate Rewards- 1.8 cents
• Membership Rewards- 1.7 cents
• Thank You  Points- 1.7 cents
• SPG- I’ve never had any interest in the program, and I do not assign a value to these points. Most seem to value around 2 cents.
• IHG- 0.7 cents
• Hyatt- 2 cents
• Hilton- 0.4 cents
• Marriot- 0.4 cents
• Delta- 1.4 cents
• United- 1.5 cents
• American Airlines- 1.5 cents

I’m sure there are many more I could list, but these are typically the programs I use, or look to use when I am trying to book a trip. These values are extremely subjective and I’m sure many of you will gladly let me know I’m crazy by not having any interest in SPG :-).

Usual Process:

When I am breaking down my redemption for a particular trip, or if redeeming a certain number of points, I always look to see if I am redeeming at a value I can accept.

I prefer to use my points over my own cash, as I value my own cash, more than cash back or points. Which means, I might actually redeem my points for less value than what some might deem acceptable. I do not redeem for less than 1 cent per point, since that is baseline I can redeem for.

If you take a look at my trip in October, I gave values of each point I redeemed. I believe those values to be true when talking about the points earned from a sign up bonus, but not the points you earn from everyday spending.

You will usually see a comparison to a cash back card, showing how much better the points are (in some cases they aren’t), but what you don’t see is the amount of spending needed for those points.

Breaking down the value is easier in this method and makes trip bookings/reports more exciting to read. I always like reading or hearing about people who redeem their points for crazy value.

The Problem with Point Values:

When you look at the value of points, I think those values above represent the value you would like to receive when using the sign-up bonus. Once the sign up bonus is gone, then I think the equation for the point values change.

I am guilty of giving point values from non-bonus spend, but a good chunk of my points do come from bonuses. I have started to become more selective in my credit card applications and looking at cards more so for their daily earning potential.

A Better Process?

After you burn your sign up bonus (however you choose to), you’ll earn your points from either normal spending, manufacture spending, or a bit of both. Even though you will earn X amount of points, the difference between using different cards is the amount of money you will spend for that “free” trip.

Let’s think of it this way…

If you needed points for your next trip and you had 2 different credit cards to spend on to earn those points. Now, you need to look beyond the bonus for these calculations.

For credit card #1 you would need to spend $20,000 to earn 25,000 points for ticket needed.

Now lets say for for credit card #2 you would need to spend $12,000, and you’ll earn 50,000 points needed for the same ticket.

I would think everyone would rather spend 25,000 points compared to 50,000 points for the same flight. But I would also think people would rather spend  $12,000 in order to earn the points necessary to have a “free” trip compared to $20,000.

Now, lets say the ticket would have cost $600, if you were to pay for it.

Under the “usual process,” the value for redemption would look like this:

Credit card #1 redemption:

• $600 ticket/ 25,000 points = 2.4 cents per point

Credit Card #2 redemption:

• $600/ 50,000 points = 1.2 cents per point.

I think most people would prefer to redeem at 2.4 cents per point, than redeeming at 1.2 cent.

What you aren’t seeing in these calculations is the amount of money spent to earn those points. If you take into consideration how much money was spent to earn those points, your calculations would look more like the ones below.

For credit card #1 redemption, it would look more like this:

• $600 ticket / $20,000 spent for points needed = 3% redemption value based of money spent

For credit card #2 redemption:

• $600/ $12,000 = 5% redemption value based on money spent

Although that ticket might have cost more points, overall you spent $8,000 less to earn those points. You would also have a better value from credit card #2 than credit card #1.

What makes this way more difficult than the “usual process,” is that you have to know how much you spent. With all the resources on tracking money, it might take a few minutes, but it can be done.

If you manufacture spending, your calculations change because you are buying points for a fraction of the cost. But, even if you manufacture spending, you would still be better off with card #2 in the example above.

Conclusion:

Everyone wants to make sure they are receiving the maximum value for their points, but I think we need to start thinking in terms of how much money we spend to earn those points. When you are calculating value when using your bonus points, a cent per point valuation is totally acceptable.

Once we move beyond our bonuses, then the calculation changes, and redeeming your points at a a sub-par cent per point basis, is perfectly acceptable. I think the object of the game is to spend less money for your “free” trip.

When you calculate the value strictly based on a cent per point basis, you could actually be spending more money for the same free trip.

How do you calculate your value for redeeming your points? Do you look at cent per point, or do you calculate based on the amount of money spent?

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