Points: What are they worth?
We’ve all seen the hype. Credit card companies encourage us to sign up for “X” credit card to get so many thousands of points after we buy $X,000 on the card within the first three months of opening the account. The airlines, hotels, rental car, and other companies do this in partnership with the banks. They wouldn’t be doing this if they weren’t making money.
But have you ever wondered what are those points worth? We have. And if you’re like us, you don’t have the time to sit down, engage in navel gazing, and figure out how to calculate them.
Some experts out there look at this issue for a living. So we asked one of them at the travel hacking cartel for the inside scoop.
Coming up with the value for points
Q. How do you decide the value of a loyalty program point?
A. The formula is this:
Retail Cost of Airline or Hotel (in cents) / Number of Points = Cost Per Point / Mile
Voila! Is it that simple? Let’s see.
Example: The cash price for stay at a Hilton in Tangier, Morocco was $283 before taxes and fees. A redemption of 30,000 Hilton HHonors points for a 3-night stay would cover the $283 (before taxes and fees).
If we apply the equation above to get a valuation, it would be:
(283*100)/30,000 = 0.94 per point.
This means that for each point redeemed, the user gets almost one cent of value for each point.
We're told the goal is to get hotel redemptions as close as possible to 1 cent for each redemption.
They also tell us the goal with airline redemptions is to get a valuation of at least 1.5 cents per redemption. For some reason, a 50% more value per point is the desirable goal.
How to afford that ultra expensive room you want
Example: A two-night getaway at a luxury Hilton property in the Maldives costs $624 a night (ugh) before taxes and fees! The cash price for this room would be $1,248.00. This means it would take 95,000 Hilton Honors points per night for this room (:<).
Here’s the valuation based on the formula:
(624*2 Nights*100) / (95,000 * 2) = 0.66 cents per point.
Using the hotel point redemption rule I cite above, this is a poor redemption since it isn’t close to 1 cent per point. This is where personal preference drives redemption decisions. If your partner has his or her heart set on staying at the Hilton in the Maldives, you’ll find a way to get the points and redeem, regardless of the per point redemption value.
So what do you do? In this example, follow the Hilton Honors bonus buy sales closely. What are they? Specific times of the year when you can buy their points at X cents per point, and, where they match (give you) the same number of points for the transaction.
Next, find out the actual cost of the Hilton room in the Maldives. That’s $1,552.00.
Next, buy your points on sale with the matching bonus feature to stock up. Let’s assume a present value of $800 for 160,000 points.
Next, add the required points to the balance in your account — in this case 160,000 — and that puts you over the top for getting your room on points only.
Next, you apply the formula:
1,552 / 800 = 1.94 cents per point!
Essentially, the conventional valuation made this transaction look like a poor redemption. But, by buying points on a point buy special and calculating the value of using points for the deal, you’re getting $1,552 worth of hotel stays for $800.
The example I cite above shows how redemption value is a personal decision. There are very poor redemptions. But, in the end, it will come down to you on whether it is worth it or not.
Some experts analyze the averages of each vendors loyalty program over an universe of hundreds or thousands of redemptions to tell you what they think a particular vendors points are worth. This yields a useful benchmark. But it’s not all that useful in specific cases. That’s because it’s up to you, the user, to decide on whether a redemption is worth it. If you want to keep your credit cards down but have many points for a particular brand in your account, you may redeem them for much less than the desired goal cited here.
Some folks are swimming in points. Sometimes they are better-off redeeming them, even at less than ideal rates, for a free night stay or flight. There’s a good reason for this. Loyalty program vendors can increase (or decrease) the value of their points relative to a redemption transaction at any time. There is no reason hoard points!
Never buy points speculatively. You should always have a redemption deal in mind before you buy.
One last point (no pun intended). When you buy points, you’re really loaning your money to the vendor interest free, in advance for the future use of their points. Think about that. Would they give you something interest free? That’s why we say, always have a redemption in mind before you buy.