How to value frequent flyer miles and hotel points


You've collected frequent flyer miles and points from your travels or credit card spend, but how do you go about the best way to spend them? Because each loyalty program is managed separately by different hotel chains and airlines, 10,000 points/miles from one program can very well be worth a lot more or a lot less in another. Much like foreign currency exchanges, one of the most common methods is to come up with a points valuation for each points currency and determine its equivalent value or worth in a cash currency (e.g US dollars).

Why do I need a valuation?

By knowing what one mile or one point is worth in US dollars (usually cents), you can start to make comparisons among cash or points currencies and determine things like whether you are better off spending 170 USD, 10,000 Hyatt points or 20,000 Hilton points for one night at a comparable hotel. (We think the 20,000 Hilton points is a better deal).

The reason for this opportunity is that an airline or hotel will typically use two pricing models - one in dollars, and one in their loyalty program currency (miles/points) for the exact same flight / room.

The example below shows room rates at the same hotel on different dates. The cash rate is about 40 USD higher for a May weekend stay, but the number of Starpoints needed is the same 10,000 points for both dates.


Sheraton Austin room rates for weekday stay in April



Sheraton Austin room rates for weekend stay in May


 

In this example, 10,000 Starpoints gets us the room for both dates, but the equivalent cash value for these points is (excluding taxes and fees) higher in May at 3.03 cents / point vs 2.59 cents / point in April. In this case, it is quite clear that using points for the May stay provides a better redemption value than the April stay.

But are you better paying cash (USD) or points for either, one or both of the cases above? This ultimately depends on your personal valuation of Starpoints. If you value Starpoints as being 2.4 cents / point, you should pay with points for either stay, since you are "selling" (redeeming) Starpoints at a value of 2.59 and 3.03 cents / point for April and May, respectively. If, on the other hand, you value Starpoints at 2.7 cents / point, you may want to use cash for the April stay, but pay with points for the May stay.

How do I come up with a valuation?

Now, the hard part is coming up with your own valuation. This is challenging to answer universally and permanently because points values ultimately depend on how you use the points and what those flights / hotels are worth to you.

A good starting point is to understand average redemption values for each program. From there, you can make adjustments according to your own travel patterns or preferences. Perhaps you frequently stay at a hotel for business where you can consistently get very high redemption values, in which case you might value those points more. Or, perhaps you don't live near an airport served by an airline whose points you have accumulated, and don't foresee a need to use them in the foreseeable future. In that case, those points are not worth as much to you.

Upper bound

Most loyalty programs allow you to purchase points/miles outright in exchange for cash currency. For example, you can buy Starpoints at a rate of 3.5 points per cent (30K points minimum). This allows us to put an approximate upper bound on the value of a Starpoint, because Starwood is unlikely to sell points to you at a cost that is less than what they themselves perceive as fair value.

Lower bound

One way to set a lower bound (albeit a very low one) is to understand the cost of acquiring points and doing a profit analysis. Say you signed up for a new credit card that offers a sign-up bonus offer of 50K points after a minimum spend (and signed up purely for the 50K points bonus). The marketing materials will promote the 50K points to you as FREE! but this is not always completely so. In terms of tangible costs, make sure to take into account any annual fees that are not waived. Intangible costs include time spent signing up and researching the credit card, impacts on your credit score, and opportunity costs of putting the minimum spend on the credit card (vs another card that may offer a flat 1% cash back, for example). Let's say you've valued these costs altogether at 200 USD. In this case, your cost of acquiring those 50K points was actually 0.4 cents / point. If you don't get a redemption value of better than 0.4 cents / point, you would essentially have been better off spending 200 USD directly on travel, rather than getting the credit card!

Published cash price vs value to you

The essence of a good points redemption is one in which the cash cost compared to the points cost is very high. But, keep in mind that in some cases this can lead to erroneous conclusions about the true value of your points.

Let's say you found a first class flight that costs either 80,000 miles or 16,000 USD. That's a valuation of 20 cents per point! In reality, however, you may or may not have spent 16,000 USD on a plane ticket otherwise. If someone were to ask you, "how much cash would you spend on this first class ticket?" that is the number that should be used in your true valuation. Just because the airline thinks its first class seat is worth 16,000 USD, does not mean that you personally extract this much value from it, and likewise means that you would not truly get 20 cents of value per point spent on the ticket.

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