Valuation of points and miles
 

I don't get how people value miles sometimes.

For example, there are some bloggers who say they used x number of miles for a 32,000 first class ticket! "That's 16 cents per mile!" But no, because you can buy miles for 3/3.5 cents per mile, so you have to be really stupid to actually buy the ticket, considering your credit card miles and "paid" miles take award space from the same bucket, right?

And then there's milevalue and lucky who more sensibly value the miles at a fixed amount, like 0.8 cents for Hilton, which is slightly better, but that doesn't make sense either because your cpm redemption value is dependent on the actual redemption. So what they're saying is like "I value 100 USD at 80 USD, but since I got 100 USD worth of stuff, I made a good purchase."

That simply doesn't make sense to me...

I agree with your first paragraph. It's a pet peeve of mine. The value you get out of a mile is only the cost you would have spent in the first place. If coach is $1000 and business is $5000, I might personally value business as $2000 for a particular trip. Therefore, the price I saved is $2000, not $5000. It's why the 100% US Airways buy miles promos make sense -- some people don't mind paying $1800 for a business class ticket to Asia (even if they forgo earned miles).

In your "I value 100 USD at 80 USD example," you're confusing two ways to think of money, which are
(1) An instrument that holds a set amount of value
(2) A liquid currency that can be used to purchase goods and services.

Instead, think of it as "I value 100 widgets the same as $100, but if I participate in this loyalty program, I can purchase points that are good for 100 widgets for only $80."

It's arbitrage, which is what this game is all about. Get points at a low cost, redeem that at a higher cost.

My "value" of a point is the price at which I'm indifferent between it and cash. For an easy example, let's look at Ultimate Rewards, which can be redeemed for cash at 1cpp or redeemed for travel at 1.25cpp. Since I like to travel, I'm indifferent to them at 1.25cpp, because I know that I will be able to get at least that much value out of them. If you came up to me and said, "I'll sell you Ultimate Rewards for 1.2 cents each," I'd take you up on that (if it weren't against the T&C).

However, if I needed to book a flight for my cousin (who flies once a year and doesn't care about earning miles, so earned miles leave the equation), and I redeem 25,000 Ultimate Rewards via United miles for an otherwise $550 ticket, then I can say "I value 25K UR at $312.50 but got $550 out of them, so that's a good redemption."

I agree with this to a certain extent, though not entirely.

Firstly, what if you would've never taken the trip if not for miles (in coach, even)? Is the value of the flight 0? Sure, you didn't save anything relative to if you had not taken it at all, but surely there's value there--subjective value, beyond simply crunching savings.

Valuations based purely on the absolute savings relative to the revenue price are flawed; yet, so too are valuations based strictly on the cash outlay that you would've made.

If someone gets you a new blender at christmas, and you would've only bought the $40 version, but your benefactor gets you a much nicer $200 version, what is the value there? Did you save $160? No. But is the value of the objectively better (let's assume) appliance somehow borne out in your subjective valuation? I think it's reasonable to think so.

I've pondered this thought before too. I know some people that book a hotel room at high season and in a certain area because cost per point has great value, this is a stupid reason to book an award stay. I never let my points dictate where i stay or fly but rather let my desire do it and use the points to lessen the burden on my pocket. Obviously you want to maximize your value per point but that shouldn't be the ultimate factor.

I think the proper way to value should be a need based valuation factoring in the lost opportunity. Skymiles are a great example, most value them as Skypesos but I actually value my pesos more than the average FF member because of the open jaw and 120K redemption to Africa. Trying to come up with a standardized fixed value for each point is silly i think, everyone should have their own individual valuation based on their needs and desires.

The other aspect is that the milevalue tote board is really a long-term approximation of value, to be used in making accumulation decisions.

If I know that, on average, I can use a particular point for 1 cent of value, I can make the decision to not spend 1.1 cents for it.

What I ultimately end up getting at redemption time is another matter. I should really be computing that based on the lowest of: the best alternative cash offer available to me from among all acceptable purchase methods (retail, priceline, similar item, etc.) OR the most I would have spent if I could have chosen the price.

Hopefully, over a reasonable time frame, the long-term valuation and the actual redemption value are the same. Otherwise I estimated poorly.

(I also want to consider cost - what did it cost me, in lost cashback, extra purchases, etc., to earn the miles? Need to keep the cost below the value at all times.)

I agree, and I made this same argument in an earlier thread. http://www.flyertalk.com/forum/19553740-post14.html

Sure, you didn't save $x by using points for that transcon F flight, but that is different than value in my opinion.

In any event, OP, this point gets debated frequently on FT and elsewhere. There is no set answer and trying to divine one will create stress in a hobby that is supposed to give pleasure.

Another place where mile redemption trumps paid tickets is in the last-minute category. Most times, there is availability in the standard awards category for last-minute trips that work out to be way more economical than a piad ticket. If you are the type of person who waits till the last minute or makes impulsive travel decisions, having the option of using miles helps quite a bit.

But, for the most part, I agree with amolkold in that the value per mile should be based on what you would have been willing to pay for it. While I understand that there are instances where you would have never bought a ticket for a certain price and the only reason you are making the trip is because of miles, I think this is a rare care. As in, say, out of 5 trips or so, there might be 1 where this line of thinking holds true...

Ultimately, you also need to look at the amount of time & energy you put into acquiring miles. As long as you are having fun doing the grind, it's great, but once it starts feeling like a chore, it changes everything.

The fixed value is an accounting measure because, like any currency, it has no real value until you want to exchange it for something else. I say my Ultimate Rewards points are worth 2 cents per point because, on average, I can find ways to use them that save me from spending at least 2 cents for every point redeemed.

But the idea that the points are only worth 2 cents and never more or less is nonsense, just as the idea that a dollar is only worth a dollar is also nonsense. Say a parking garage charges $10 an hour. If it's a slow weekend and it's not raining I'll park on the street three blocks away and walk. If it's the Christmas shopping season and it's a torrential downpour, I would gladly pay $20 an hour. The rate the garage charges doesn't change, but my assigned value changes. When the value I get is more than $10, I am willing to exchange the cash for a parking space.

A short or a long domestic award might both cost 25,000 miles, but if they have very different cash prices one is worth it and one is not. That doesn't change my accounting practice of valuing miles at 2 cents each.

And yes, the people who say their miles are worth 16 cents each are wrong, unless they would actually pay $10,000 for a first class ticket.

I think two useful ways to look at valuation are as follows:

If you receive miles/points in a transaction where you cannot find a tax rule that allows you to exclude the "income" on your tax return, what "value" of the miles/points would you list as "income"?

If you were making a loan to someone and he listed the miles/points as collateral, what "value" would you assign to this collateral?

Do I hear a lot of $0s?

To me, these miles/points are simply a coupon system that allows me to buy travel at a discount. I almost always have to pay something when I obtain miles/points and I almost always pay something when I use them. The value of what I purchase is the post-coupon price. The coupon itself had no value.

Most of the time I never would have purchased the travel at all if I did not have the coupon. Every once in a while I might use my coupon to buy at a discount the travel that I otherwise would have paid the non-discounted price for, but that is rare.

If I get a coupon to get an $8.95 burger for $4.95, I do not think that my coupon had a value of $4.00. That does not mean that I do not enjoy the burger I buy with the coupon. But the burger was worth the $4.95 I paid for it, not $8.95. The $4.00 coupon did not have any value to me. In fact, if I did not have the coupon I probably would have gotten a 99 cent McDouble off of the value menu, so my $4.00 coupon likely made me spend more than I otherwise would have.

This is all very interesting. Didn't we leave intrinsic value behind in the 19th century? To be completely honest, I find that Lucky values miles in a very pragmatic way that can be applied more generally, not unlike the way an asset might be valued by a major bank. Those who consider the value to be based off a specific redemption are going for a particularized approach that has little value outside of the individual redemption. At bottom, the points have no value beyond that which is given to them by the market, which in this case isn't the NYSE and therefore is not even remotely static.

Were I to value my stash across 54 hotel and airline programs I might say $20 per k. This is an estimate of average value after years of consuming miles in the same manner as your congress consumes debt.

Valuation
 

I work in investment banking, and regularly do corporate valuation. Although points & miles is different, the approach is similar.

Most people understand the concept of "intrinsic value", that is, to most people a $10k flight is not really worth $10k. This is similar to sticker price on an overpriced car - some people will buy it, but most will buy it closer to its true value. This concept is applied to miles: Most people wont purchase miles at 3.0 cents/mile, but might do so at 1-1.5.

The concept that most people don't understand in valuation is Opportunity Cost. Simply put, this is the next-best alternative you forgo. In other words, let's assume you value American Airlines miles at 1.5 cents. If you have a credit card that earns you 1 mile per dollar, then you are actually not maximizing your utility, since there are credit cards out there that will earn you 2% on everything. You are essentially "losing" 25% of your maximum utility. In other words, assuming no sign-up bonuses, if you don't value any of your points higher than 2%, your opportunity cost is higher than the value you are deriving from spend.

Another point is "relative utility". This is similar to the example of a bottle of water. You can buy a case of water for $4 per 20, or roughly $0.20, $1 at a mall, or $5 at a sporting event. Let's assume this is the exact water bottle. Why do we pay literally 25x more at a sporting event for the same product? It's because of relative utility. We know it isn't "worth" $5, but at that moment, the value you get from it is. The way this relates to points is this: I won't ever use additional $ or points on a suite if I am staying in a hotel alone, but if my girlfriend comes with, the value of a suite goes up, as I am willing to part with my $ and/or points for the upgrade.

I have a pretty detailed excel model where I have all of my valuations, albeit subjective valuations. Although I have gotten amazing redemptions, keep this in mind: Your points values for redemptions should never exceed the cost at which you can buy them directly

It is not correct to say "I got 5 cents per mile on that last minute United miles redemption". No you didn't because no one would ever pay more than the cost to purchase them outright.

People do this all the time, especially in the corporate context.

Valuation, Part 2
 

Not really. As the consumer, you don't pay $30 for a stock that's trading at $20. What you are referring to is when a company pays over the enterprise value for another company. This does regularly happen, since synergies can sometimes justify this.

For the purpose of miles and points, my "quick" rules are:

1. Always get over 2% in value from spend, since that is the baseline
2. Never value your points or miles at an amount greater than you can buy them at.
3. When redeeming, always calculate the NET cost/mile.

For instance, let's say you redeem 50,000 miles for a $1,000 trip that is 10,000 miles away. Most people would say "Oh I got $0.02 cents per miles ($1,000/50,000). However, you must take the forgone miles you would have earned, into your redemption. In this example you forgone 10,000 miles by redeeming an award.

You basically "spent" 60,000 miles instead of 50,000. This example also does not include elite status, which further supports reason 3.

Sorry if I was unclear -- I was talking about airfare, not mergers and acquisitions. My point is that even if people can fly LAX-NYC for $x or they can buy 25,000 miles for $x-10 and use those miles to fly LAX-NYC, many people will still buy the revenue ticket. By the "corporate context" above, I meant corporate travel. But this happens even among leisure travelers.

Your statement that "no one would ever pay more than the cost to purchase [miles] outright" assumes people are (a) rational, and (b) have perfect information. Both of those assumptions are often wrong in the real world.

All of this also ignores the fact that booking an award ticket comes with additional annoyances and restrictions. But even assuming booking award tickets and buying miles do not entail any additional transaction costs over buying a revenue ticket, I still stand by my statements. :)