Frequent Miler's wrongheaded approach to redemption values

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Frequent Miler's a smart dude, whom I respect for his dedication to the craft. Sometimes, though, I have the sense that he gets a little up in his head. In today's edition of "Frequent Miler overthinking things:" redemption values.

Background

In three recent posts, Frequent Miler has sought to find a rubric for understanding the "reasonable redemption value" of various loyalty currencies:

The underlying principle behind the series is that the value you should feel comfortable redeeming your points at is based on the typical price of the product you're redeeming them for.

But that's not right, and here's why.

Forget 5%

If you have a 5% cash back-earning credit card, then presumably you already know you need to be putting as much spend on it as you're comfortable with. You're going to get more value from each dollar spent at 5% cash back than you will with virtually any other credit card (unless you're going for a heroic signup bonus or high-spend threshold on your alternate card).

Forget "unlimited"

I have a commenter here on the blog who regularly chastises me whenever I write about opportunity costs, because of the possibility of "unlimited MS at negative cost." But even if you did have access to unlimited manufactured spend, you'd still want to spend your time (which, last time I checked, is not unlimited) manufacturing that spend on the most lucrative cards possible.

What do you actually redeem your miles and points for?

Here's where Frequent Miler goes so far afield. He argues,

"I think it is important to supplement Fair Trading Values with estimates of the redemption values of points and miles.  Such numbers could be used to help decide whether buying points or miles is a good idea.  And, they can be used as a target when booking awards to ensure that you get good value from those awards."

But he doesn't explain why. And that's because no sane person starts with redemption values, then decides whether a redemption is worth making. Sane people start with a trip they want to take, and then figure out how to pay for it.

How about an example?

In the latest edition, Frequent Miler suggests that a reasonable redemption value for Delta Skymiles might be 1.02 cents for domestic economy redemptions, on the following grounds:

  • the average domestic flight costs $381;
  • it's typically possible to fly for somewhat (10%) less than average;
  • Delta charges up to $10 in fees on domestic award redemptions;
  • and you'll typically end up paying 32,500 for a domestic award redemption.

The problem

All of this begs the question: if you're getting just 1.02 cents per Skymile for your redemptions, why do you have any Skymiles at all?

I ask because every dollar you put on an American Express Delta Platinum (earning 1.4 Skymiles per dollar at $50,000) or Delta Reserve (1.5 Skymiles per dollar at $60,000) card could be put on a 2% or 2.22% cash back card. 

Furthermore, all your paid flights on Delta could be credited to Alaska Airlines' much more lucrative Mileage Plan.

The answer, of course, is that you have Skymiles because you get more than 1.59 cents (Platinum) or 1.48 cents (Reserve) per Skymile on your redemptions.

In other words, if you're getting just 1.02 cents per Skymile on your redemptions, you need to redeem all your Skymiles and stop earning more as soon as possible.

So what's my alternative?

The alternative approach, which I've advocated in my own posts (Club Carlson, Hilton) is to instead start with the cost of acquisition and ask a far simpler question: "how much do I need to value this redemption to justify putting the needed spend on a co-branded credit card instead of a 2% or 2.22% cash back credit card?"

The best part is that this exercise allows an instant validation of whether a trip should be paid for with cash or points, based on actually existing prices for the product you're interested in.

A real person starts by saying, "I'd like to fly roundtrip on Delta between Madison and a New York airport (but not Newark) for a weekend in June."

Then they pull up an ITA Matrix search and find the lowest fares available:

As you can see, our little weekend romp will cost between $460 and $541.

Then a real person hops on delta.com (or, more likely, alaskaair.com) and checks award availability, immediately seeing whether they are getting more or less value than their points' acquisition cost:

Using this technique (again, the thing that people actually do when evaluating redemptions), we can calculate our redemption value for each weekend:

  • June 5/6 — 8: $540/25,000 Skymiles. 2.16 cents per Skymile;
  • June 12/13 — 15: $460/25,000 Skymiles. 1.84 cents per Skymile;
  • June 19/20 — 22: $460-$520/32,500 Skymiles. 1.41-1.6 cents per Skymile;
  • June 26/27 — 29: $475-$540/32,500 Skymiles. 1.46-1.66 cents per Skymile.

Here's the thing: these are all great redemptions, not because of the high value you're getting for each Skymile but because you already have 25,000-32,500 Skymiles, and if you don't redeem them they're just going to keep collecting dust.

After redeeming, decide whether to keep earning

Once you have a load of Skymiles it's too late to start considering redemption values. The time to make that calculation is before you earn them.

If in your market, for your travel needs, you're redeeming your Skymiles for less than the implicit cost of acquisition (putting the spend on a 2% or 2.22% cash back card), you shouldn't be putting spend on that card to begin with (unless you're doing so for other reasons, like Medallion Qualifying Miles or the Medallion Qualifying Dollars waiver).

That doesn't mean you shouldn't plan ahead

Over at Milenomics they're doing the Lord's work advocating for a rational approach to earning and burning miles, and one of the centerpieces of that effort is so-called "demand schedules," explicit plans for upcoming trips and the miles, points, and cash currencies the traveler plans to redeem for them.

Demand schedules can't anticipate everything, however. If you have an upcoming trip to Milan planned with American AAdvantage miles and you suddenly discover a $200 one-way flight, you shouldn't blindly book the ticket with your AAdvantage miles anyway. You should, however, be ready to spend those miles as soon as possible, even on a less expensive trip you might have been planning to pay for with cash.

Because once you've passed up the opportunity to earn cash back, and instead earned miles or points, it's too late to start calculating [edit: ideal] redemption values.