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I had the chance to eat breakfast in the Delta Sky Club at New York-LaGuardia airport the other day. The lounge is bright and airy, the service was far better than what I have come to expect domestically, and the chia seed pudding tasted like a deliciously deconstructed cinnamon bun, making me feel simultaneously delighted and yet derelict to my duty to maintain a healthier diet. I thought to myself about how valuable SkyClub access would be to me if I flew out of that airport regularly. However, somewhat ironically, I had that experience while traveling home from The Travel Summit in Toronto, where I advised people to value things like that very conservatively. Despite my delight with the lounge, I stand by that advice. This post isn’t about a new concept at all, but rather it is a new attempt to convince you that Greg has always been right to value credit card perks ultra-conservatively.
An extreme example to illustrate the concept
Greg has often talked about valuing benefits based on the cost you would be willing to pay to subscribe to them. That approach always sounded right to me, but at the same time it is sometimes hard to quantify that or to even approach things in that way. But as I was preparing my presentation for the conference, this line from Greg’s post about Which premium cards are keepers? stuck out at me (the bold is his, but the green highlighter is mine for emphasis):
- Value perks based on how much you’d be willing to pre-pay if it was available as a subscription. Don’t estimate based on how much you’re likely to save.
What is the difference between how much you’re willing to pre-pay versus how much you’ll save? Does it matter? An example came to mind that helped frame my mindset on valuing perks that helped me think about it more clearly.
Imagine that I offered to book $1,000 per month in travel for you — that could be flights, hotels, rental cars….the choice would be yours up to $1,000 per month. That’s up to $12,000 in travel over the next year. Each month, you simply contact me to book your travel and I’ll book it up to $1,000 each month. You can’t roll any value over — each month starts fresh with up to $1,000 in travel, use it that month or lose it.
How much would you be willing to pay me today for me to give you $1,000 per month in “travel credit” toward bookings I make for you?
If you pay full face value, you lose $600+
If you say that you’d pay $12,000 because you ordinarily spend that much, I’d say we’ve got a deal.
Yes, I know that there are probably some readers who do spend $1,000 per month on (likely business) travel. But I’d still take that deal if you wanted to pay me $12K now to book it over the course of the year even if you intended to use the benefit in full! (Note: No, not really in the sense that I have no desire to start a travel agency, but mathematically speaking I’d take this deal).
At a base level, I’d put your $12K into a high-yield account that earns 5% APY and according to the APY calculator I just used, I’ll end up with $284 in profit even if you use the full $1,000 every single month.
Then I’ll also earn the rewards on that $12K in bookings. If we assume that I’ll use a card with a return of at least 3% back on travel, that’s another $360 in rewards that I’d earn while booking your travel if you used the full $12K.
So if you paid me full face value in advance, I’d earn $644 on you with that trade even if you used the full value. Alternatively, you could have that that $644 in cash and rewards. Paying me full face value in advance is a bad deal.
Obviously that feels different when you’re working with a much smaller figure — like a $300 annual travel credit — but the concept still holds true, albeit on a much smaller scale.
Being conservative makes more sense
I picked the structure I did ($1K per month) intentionally. I imagine that most readers probably don’t spend that much on travel each month, so you probably know that you wouldn’t use that benefit to full “face” value (and as shown above, the numbers make it quite clear that you’d come out behind if you did think it was worth paying full face value). You therefore likely wouldn’t dream of paying me $12K in advance for it.
At the same time, I bet that there is a price at which you would be a buyer. I bet that many people have at least one month out of the year where they ordinarily spend more than $1,000 on travel (and for many, I bet that there would be several months where they spend that much or at least would make a good dent in that monthly travel credit). Let’s imagine that, like the “average” family of four, you spend about $4,000 per year on vacation (I’m making that number up a bit because if you Google it, every site seems to have a different estimate, but that’s in the ballpark of the “family of four” price according to most sites). How much would you pay for my $1,000-per-month travel booking services subscription?
In that scenario (where you ordinarily spend $4K per year on travel), would it be worth paying me $4,000 now?
Obviously it wouldn’t be worth that. At a base level, see the example in the previous section to know that it isn’t worth paying face value in advance, but in addition to that math, keep in mind that you can’t be sure whether this year will be a “normal” year. If you weren’t getting a discount to pay in advance, you’d be better off just paying for your travel as it came up.
Would you pay me $3,000? Maybe you would if you already had a few bookings in mind. You might even convince yourself that you might add on a weekend away a couple of times throughout the year in months when you wouldn’t otherwise travel since you’ve got this benefit to use. In those cases, you wouldn’t really be “saving” face value on those extra trips since you wouldn’t have taken them without the benefit, but you’d still be getting something of value out of a weekend in Miami or in the mountains or whatever the case may be.
At the same time, if you don’t use the monthly $1,000 at least 4 times, you’re coming out behind financially if you paid $3,000 for it. And if you only use it 3 times, was it worth the hassle of having to call me to book something? What if you find something available at 3am and you have to wait for me to wake up to book it? You might ordinarily spend $4,000 per year on travel, but maybe you normally book it all at once instead of split over the course of four months. I don’t know if that’s enough of a deal to make me gamble on the inconvenience or the chance that I may not use it.
But there certainly is a price where I’d find the gamble worthwhile. For instance, if I could pay $1,000 now for the benefit of a monthly $1,000 travel booking allowance, I’d jump all over it. First, I currently have travel plans I need to book, so I know I could use the Month 1 credit immediately. And as someone with a mobile job (and married to someone else with the same flexibility), I know that I would very likely be able to use the credit at least a couple more times. A $1,000 price tag seems like a no-brainer in my shoes. How would I feel about $1500 or $2000? Those are the types of questions I’d have to consider.
And in reality, given my super-flexible position, I’d probably value a benefit described like this more highly than most. But my point here is that even if you’re thinking you’d only pay $1,000 a year for $1,000 a month in travel credit, there is still probably some price at which you would be a buyer — and that price shouldn’t be the full face value.
And I picked a bigger number so you could see that it also shouldn’t be terribly close to the full face value. Even if you had a lot of flexibility, it would be hard to consider pre-paying $8,000 or $9,000 to gamble on using that credit nearly every month out of the year. When working with bigger numbers, it becomes clearer that the discount needs to be substantial to make it worth putting your money out there in advance.
Apply the same concept on a smaller scale for credit card perks
That’s the type of philosophy with which you need to approach annual credit card benefits — even when they represent smaller sums, the concept isn’t different. Don’t think about how much you’ll save compared to the sticker price of what you get. In my fictional travel example, if I leveraged my location flexibility (as a remote worker) to use the credit every month, will I have “saved” $12,000 this year? Of course not — despite my location flexibility, I wouldn’t have spent $12,000 this year without that type of benefit. In my opinion, it isn’t helpful to think of benefits in sticker price form but rather in terms of how much you would have considered pre-paying.
When you’re valuing ongoing credit card perks, it is important to think of them in this way. Rather than considering how much you’ll save, considerhow much you would be willing to pay to subscribe to the same benefit. Do keep in mind the “use it or lose it” nature of most credit card benefits when running these type of evaluations.
And so, running back to my Delta SkyClub example at the beginning, how much would I have been willing to pay to enter the SkyClub? Would I pay $20 for a single-access trip? I only had about an hour, so I probably wouldn’t have paid that much to get in. However, I was hungry, so I think that I probably would have spent about $15 on a bagel and a coffee somewhere in the airport if I hadn’t gone to the club. I’d therefore have probably been willing to pay that $10 to get into the club since I would expect that price to save me a couple of bucks.
If I’d be willing to pay $10 to get in one time, how much would I be willing to pay to get in an unlimited number of times over the course of a year? That’s the type of question that I have to ask myself. Since I don’t actually live near LaGuardia airport, and since I haven’t had a reason to fly from or through it in years, I don’t think I’d be willing to pay much more than $10 if LaGuardia were my only option for using access. Of course, in reality, I can get access to any Delta SkyClub when flying Delta. Still, I’ve had a Platinum card for years and this was my first time ever using it to access a Delta SkyClub.
Therefore, I wouldn’t value the benefit beyond the $10 that I think I’d have paid for access this time (actually, I used it on both the outbound and the return, but I digress). Someone who flies out of LaGuardia often will have a dramatically different value — but even if you fly weekly, you probably don’t know that it will be Delta every time, you don’t know if you may get to the airport too late one day to use the lounge, etc. There is quite a bit of guesswork, but do make sure to guess on the conservative side on benefits like this one. If my alternative is spending $15 on a bagel and coffee elsewhere and I think I’ll use the lounge six times this year, I should be valuing the benefit at more than $90 (six times $15) — and in fact, if I assume that the $15 coffee-and-bagel is my alternative option, I should probably value the chance to subscribe to lounge access at significantly less since my bagel-and-coffee example does not need to be paid in advance and it includes no chance of breakage since it is a pay-as-I-go option. I’d only prepay for lounge access over buying my bagel and coffee if I thought I’d save substantially.
All of this post is really to support the work that Greg has long done in the post Which premium cards are keepers? and its associated spreadsheet. When you enter values for the various perks, keep this concept in mind. It’s important that you don’t overvalue perks, thereby selling yourself something at a price that doesn’t give you room for a big win.
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For me flying in business class is something I value highly, hotel stays not so much.
We were just in Vienna and I used points for 3 nights at the Ritz Carlton. Often hotels like that are stuffy and too fancy for me.
This stay was great. People super nice, no attitude, etc. I would love to return but at the same time I could be quite happy in a convenient, safe, clean and quiet hotel room at a much lower cost and much less luxury.
Airport lounges are nice but currently are a zoo in many locations. We were in Chicago and the lounges there were extremely crowded. I would be upset if I was paying $500+ for access and had to struggle to get in or find a seat.
Unfortunately I find travel now to be more of a hassle than enjoyment due to crowds, costs and extra fees. I can do without it.
Great post Nick. My immediate thought was “this is the same argument against most timeshares”. Prepaying to have the ability for a few weeks of stays each year, that you have to use or lose each year, requires a substantial discount to be worth it.
Your discussion on this at The Travel Summit was really well done and I was glad to see that you are just as pleasant to talk with in person as your online persona!
My P2’s favorite part of this hobby is lounges. I have to give extra value to cards that get us into lounges, because that’s how he puts up with applying for credit card bonuses and calling for retention offers.
I generally agree with your assessment. I will say though that humans are often made very happy by things that they would never actually buy for themselves. Like I agree that a visit to a decent lounge is probably only worth about 15 bucks — unless you’re the type of person who routinely drops 15 bucks on a cocktail. But if you can get into the lounge, you’ll likely treat yourself to that cocktail you wouldn’t otherwise buy, plus eat some food. So it’s hard to actually measure, but if you find that certain credit card perks actually make you happy, you should value them at more than your out of pocket savings.
The same logic can be used for travel points in general. We’re paying the banks in annual fees / MS costs to acquire points that we may or may not use in a timely manner. For many cashback could be the better currency even though it’s less fun.
I think this leads in to the case some make for an earn and burn points strategy. Millions of points in reserve for a future redemption could have been $10Ks of cashback (UR, MR, and TYP all have straight forward cash out options). And that cashback could be earning 5%+ APY with today’s high yields.
The cpp you can get on travel redemptions is so high that I’d argue it’s still worth having a decent stash of points on hand, but it helps to remember there is an opportunity cost to that and it’s to the tune of hundreds or thousands of dollars a year in interest.
Brilliant. Thanks for all you do
great post. So many bloggers short cut this. As in the Chase Reserve has a 550 annual fee, but a 300 travel credit. The credit is worth more like 250-275, its definitely not worth 300 since you prepay and don’t I think earn points on the travel.
The Chase Reserve travel credit can be used on any travel. It sounds like you are using it just for Chase’s portal. It is actually worth the whole $300 because you can use it for anything travel like airfare or hotel stays (booked directly through the hotel), tolls, etc. The hotels don’t have to be prepaid.
There are other credits that I definitely value less, but I always got the full $300 when I had the CSR.
Just to clarify, the hotels don’t have to be booked directly to work, but I always prefer to book directly which gives me the full $300 value.
Tom’s point is that:
#1) You’re pre-paying $300. If want to pre-pay for 1 year of let’s say Disney+ or your life insurance or health insurance or whatever, you won’t pay the monthly price x 12 — paying annually yields a discount in all of those situations where you’re prepaying for the service, so at least by that measure on may say that pre-paying (by paying your $550 annual fee, you’re essentially pre-paying for $300 worth of travel + the other card perks before you use it), you should be getting some discount. Even the advance purchase rate for a hotel provides a discount — again, committing your money in advance usually gets you a better deal.
But even if you’re not going to buy into it being worth less than $300 based on that logic, then:
#2) You won’t earn Ultimate Rewards points on that paid travel. So whereas $300 worth of travel will usually earn you 900 Ultimate Rewards points, you’ll earn 0 points on the travel that gets rebated with the annual travel credit. So by using the travel credit, you’re missing out on 900 points. If we value those points at 1.5c per point, that’s $13.50 worth of points that you do not get because of the travel credit. So whereas if you had paid for $300 in travel that wasn’t rebated, you’d have the travel you bought + $13.50 worth of points, you get a slightly worse deal when using the travel credit (yes, you get the $300 worth of travel, but not the $13.50 in points). Therefore, you can’t really value the $300 travel credit at more than $286.50. If you’d have otherwise used a card that offers a better return on spend (like 5%), then you’re missing out on $15 worth of rewards — adjust accordingly.
Don’t get me wrong, I always use that $300 up right away, so argument #1 about pre-paying is weaker in my shoes since I’ll almost always spend that $300 in month #1 anyway, but point #2 is pertinent for all of us and certainly makes the credit not worth as much as the face value.
There are so many nebulous and intangible aspects to travel and experience that if one tries to abacus their way to a decision on whether or not to keep the card, they are probably just going to end up confused, miserable, and enjoying things a lot less than they other wise would. We must look at things in the aggregate.
Let’s say a card has a $700 annual fee. Look at the totality of what you received from that $700 in the past year–the lounges, the items, the services, the discounts, the time saved. Is it worth $700 to you to buy that experience again? If so, keep it. If not, get rid of it. But don’t delineate each experience into a dollar amount using this method or that; you’ll never reach the end of that tunnel.
“Is it worth $700 to you to buy that experience again? If so, keep it. If not, get rid of it.”
This post is literally asking you whether you would prepay $700 for such an experience…
No, the article examines this question on a benefit by benefit basis. The point I am making is looking at the cost/benefit analysis on a per benefit basis will lead you into even murkier water. Extending the subscription analogy in the article, it would be like asking a consumer to decide on weather or not keep a streaming service based on what they would be willing to pay to watch a service per episode. It devolves quickly into nonsense. Instead, the simply solution is to just look at the product as a whole and what it cost. Would you pay that much to have the totality of the experience of having that product again? If yes, pay. If not, cancel.
“Instead, the simply solution is to just look at the product as a whole and what it cost. Would you pay that much to have the totality of the experience of having that product again? If yes, pay. If not, cancel.”
And how are you going to determine the value of the product as a whole without understanding the value of the individual components? By using your feelings? This is exactly the type of behavior credit card issuers want, someone who doesn’t want to think too hard about the benefits that they’re overpaying for.
Here’s a simple example about how non-sensical that mindset is. If a restaurant is selling a burger for $8, fries for $3, and a drink for $2, but they sell it all as a combo for $15, are you saying that as long as someone felt that the combo was worth $15 that they should continue to pay $15 for the combo?
“And how are you going to determine the value of a product as a whole without understanding the value of the individual components? By using your feelings?”
Yes? All value is determined by feelings. If you don’t feel something is worth it, you don’t pay for it. If you do, you do. Even your example betrays your logic. The burger is $8. I *could* find a patty for cheaper, I *could* grow my own lettuce and *could* buy a jar of pickles, etc. and end up with a burger that costs a whole lot less than $8, so is the $8 burger “worth” that? To me, yes, because I want *that* burger. Others may think it over priced and pass on it. Maybe enough people will agree with the stated value to keep the restaurant open, maybe they won’t and it’ll close. Value is always tied to experience.
And the more and more components that are included within the price of the experience, the less and less sense it makes to price out those individual components in determining the value. You do not price out the individual cost of each ingredient in the burger to determine if you are getting a good deal; you accept the cost is the cost and you determine if that cost is worth the experience of eating that burger.
Your counterargument is asinine because as you pointed out, making a burger from scratch involves a lot more time and labor, which is the tradeoff for money.
The choice that I presented is between buying a $15 combo or buying the burger/fries/drink individually for $13. If you think that paying $15 for a combo that you can JUST AS EASILY buy for $13 is ok, then you really are the perfect customer.
Yes, correct, nearly anything one buys–good, service, or otherwise–comes with the tradeoff of time and labor. We call this convenience. That’s the purpose of buying nearly anything, is it not? Is there some thing you have in mind that doesn’t factor the time, labor, and convenience into it’s price?
Convenience is worth something, and many of the benefits associated with annual fees are credits of convenience; which–as my initial post stated–is a nebulous and intangible variable that is impossible to quantify. For some the convenience of TSA-pre is worth the price, for others it’s not; for some the convenience of Walmart+ is worth the price, for others it’s not; for some the convenience of lounge access is worth the price, for others it’s not. Trying to quantify convenience and experience line by line is silly, but they still have value, whether it be burgers or something else.
Burgers–like all products and services–have time and labor baked into the price, so if it is asinine to consider them when figuring the value of a burger then it is asinine to do the same for the value of a card’s benefits which is, after all, entirely my point.
It is interesting that you would find my example so problematic while ignoring entirely the nonsensical nature of your own; what company on this planet sells a collection of their products for *more* money than pricing them individually?
I agree with you Shawn. We can over analyze benefits & costs. Where that is for each person depends on one’s own capabilities, time, & interest.
But there is a point of diminishing returns.
Applies to many things. Too much of a “good thing” is often not so good, or just outright bad.
Sometimes look at the details, but must also look at the aggregate / larger picture.
Picking apart individual lounge visits and assigning a cost is like not seeing the forest for the trees. We’re all guilty of this or the reverse at different points.
Nick is a very detailed & analytical guy. That’s great for the vast majority of posts on FM — but sometimes too much – at least for me.
Have I done s/s analysis a la Greg, Nick or whomever on valuing high a/f cards – sure. Do I break it out by individual lounge visits – no. I just look at something in totality. I may think about how many times I may use a particular lounge type in the future and/or if I have a viable alternative.
On that note…time to downgrade the Chase Sapphire Reserve on the next a/f later this year…no more restaurant visits. Hahaha.
“It is interesting that you would find my example so problematic while ignoring entirely the nonsensical nature of your own; what company on this planet sells a collection of their products for *more* money than pricing them individually?”
Considering you’re literally arguing that you’d gladly pay more money when you “feel” that it’s worth it to do so in order to avoid thinking too hard, apparently the market exists, so maybe you should tell these companies that they have an untapped market.
If it takes you an agonizing amount of time and effort to think about what a short list of benefits is worth to you, then by all means, keep doing what you’re doing.
Huh?
I fill out a spreadsheet as mentioned in the blog post. The spreadsheet makes me look at the totality of the experience because it talks about “the lounges, the items, the services, the discounts”.
This isn’t like Zeno’s paradox where you’ll never reach the end. Either you get $700 or more of value when you got through the tally or you don’t.
Hopefully Amex reads FM! Their coupon books have gotten out of control.
The logic here is excellent. Nice article Nick.
Finally, a CC/Points blogger willing to tell the truth! That’s how you earn trusts from readers. Unlike TPG… lol
I think the calculations should include two. Kind of like a realistic “break even” point. Dollar for dollar. For example you know you have 3 trips coming up and would get the $15 coffee/bagel. So it’s worth absolute minimum $45. Then the “gamble”. That you maybe have 2 extra trips you’d be flying Delta so if you paid another $15 to risk getting 2 visits, you’d save $15. Overall kind of like buy 4 get one free. That’s kind of how I look at it
Great post Nick!
Very thought-provoking! So, according to this criterion, which cards are still “keepers”?
Use the spreadsheet – https://frequentmiler.com/which-premium-cards-are-keepers/
Oh, I have Greg’s spreadsheet. I just wondered whether the concept of valuing by what one would spend vs. what one “saves” changes the calculus at all. Thank you.
If you walk through the spreadsheet, it goes benefit by benefit of each card and asks you what you would spend for that specific benefit. The spreadsheet is doing what Nick is talking about in this article.
Pretty much everyone will have a different answer for that question. One size doesn’t fit all, or come even close.