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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.
The Fair Trading Price chart is a permanent page on the Frequent Miler site. A link to Fair Trading Prices can be found at the top of every page (just below the banner).
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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[…] Fair trading prices explained […]
[…] One of the best analyses that I’ve read was done by the Frequent Miler who defined the concept of “fair trade pricing for points and miles” which essentially looks at the trade off putting credit card spend on a points earning card versus […]
[…] For cards that earn points instead of cash back, I’ve listed the “X” which is the number of points per dollar earned for everyday spend. For example, “2X” means that the card earns 2 points per dollar for everyday spend. I then used my Fair Trading Prices point valuations to estimate the rebate value as a percentage. For example, if a card earns 5X on all spend and the Fair Trading Price of those points is .4 cents each, then the card earns an estimated 2% rebate on all spend. This does not mean that you will get only 2% in value from your points, you may get much more (see “Fair trading prices explained“). […]
[…] Fair trading prices explained […]
[…] Many people find the Fair Trading Prices charts confusing. Why does the table value United miles at only 1.31 cents if we can easily get 2 cents or more value from the points? The reason is that these charts ignore redemption value. They are based entirely on an estimate of how much it usually costs to acquire the points. Still confused? Please read “Fair trading prices explained.” […]
I think we’re both right. It is a rebate if less than 100% and profit if greater than 100%. Perhaps a better word would be return instead of rebate in the equation. The complicated part is the ($$$ for points) because how often can one really accumulate enough miles for a reward at the same rate (cpm), especially for big reward redemptions. Subsequently, you can determine the needed redemption value or accumulation rate if you wanted nothing but profit using the equation.
I like your coupon book analogy. For the sake of simplicity, how about this equation
Rebate = ($$$ of ticket) / ($$$ for points)
where the rebate is realized when you actually redeem the miles as oppose to just projecting potential savings. ($$$ of ticket) is ticket price if you were to buy it, and ($$$ for points) is the amount spent to acquire the rewards points without discriminating between spend for sign-up bonuses, PPM schemes, etc. Of course, this ignores elite qualification aspects from actually buying the ticket. Your comparison to fair trading prices at least guarantees a higher rebate than usual, but the other side of the equation requires a look at the redemption rate. You can rearrange the equation if you decide on a minimum on rebates you would like (say 25%). The minimum cost of the ticket would then be
($$$ of ticket) = Rebate * ($$$ for points)
churnity: I’m not sure I fully understand what you’re trying to get at with the equation. It looks like you might be trying to calculate profit, but as a ratio rather than a difference? For example, if you bought a bunch of miles for $1000 and then redeemed for a $3000 ticket, you can argue that the profit (as a difference) is $2000. Your equation gives a multiple: 3X. E.g. redemption value in my example is 3 times the acquisition value. This is a nice way to look at the redemption value because you can easily see that you tripled your money (in a way). However, I don’t think of that as a rebate. Instead, it is a great use of the miles you bought. Am I missing something?