Most Miles And Points Valuations Are Wrong — Why All The Published Numbers Are Too High

Most miles and points valuations start from the same flawed premise: they measure how much travel a point can buy, then treat that number as if it were cash value. That massively overstates what points are actually worth, because points are less flexible than cash, carry devaluation risk, usually are not spent right away, and often replace travel you would not have bought at the published price in the first place.

In writing about how Citibank is devaluing points transfers to Choice Privileges and Preferred Hotels I Prefer, I mentioned valuing Choice points at roughly half a cent apiece and reader L3 took exception.

So it’s worth walking through how I think about valuing points – and why most people offering their values are doing it wrong, or are at least imprecise in what they’re saying – and why that matters. I don’t think I’ve explained this in about three years.

@Gary: One point: Your Choice point valuation should be 0.75c. Frequent Miler obtained a million-datapoint database from Gondola that established that. It is conclusive.

“Thanks to them, we now have access to results from ~980,000 domestic and international Choice Privileges award searches across almost 5,000 properties,”

The starting point here is to understand that there’s a difference between ‘how much travel a point buys’ and ‘how much travel a point is worth.’

When Frequent Miler uses Gondola data to look at what Choice Privileges points can get you, they are answering the question “how much travel will miles buy?” That is only related to, and a starting point for answering, “what are the miles worth?”

This matters because most sites systematically overstate the value of points because they are telling you ‘how much travel could a point potentially buy?’ and that’s not actually what that point is worth.

• The value of a mile is the amount at which you’re indifferent to holding miles vs. cash.

• But even if you can get $11 in airfare for 1,000 Delta miles you’re still going to prefer $11 cash over 1,000 miles if you had to choose. They aren’t equivalent.

You can buy whatever you want with the cash, but you’re restricted to spending Delta miles however Delta says you can.

And even coming out of pandemic inflation, there’s far greater transparency over how much things are going to cost in money than in miles.

You can even earn a rate of return on your money – outpacing inflation – while your miles are only going to become less valuable.

Answering the question how much airfare do miles buy, or what hotel stays they pay for, is one way to start an answer to how much are miles worth, but it is not the answer. It’s the maximum possible number you can get to, but then you need to take discounts against limitations on use, against inflation risk (devaluation), and for time (discount to present value when you’ll redeem in the future).

• Points that can only be used for travel aren’t worth as much as cash that can buy anything. You can spend cash on more than just what an airline says you can, and you can invest cash to earn a return. You should discount the value of miles for their lack of flexibility compared to cash.

• Points where there’s more devaluation risk than a dollar need to be discounted as well.

• And points that you aren’t going to spend right away, and don’t earn a rate of return in the meantime, need to be discounted for time too.

So you take a point that buys 3/4ths of a cent on average against what you really would have spent on the room (would you have booked that room for cash at that price) and you still need to reduce that by several factors to get the actual cash value of the point.

Furthermore, the value of a mile depends on how many miles you already have. If you have 23,000 miles and earn 2,000 more to put you over the top for a 25,000 mile award, those last 2,000 miles have much greater value at the margin that the ones you acquired earlier. (You’d be willing to spend more to accumulate them, since it’s those extra points that make the award possible.)

At the same time, if you have millions of miles then the next 2,000 miles are worth very little. You may never spend them! And if you do it may be far into the (devalued) future.

Plus, also remember than when comparing the cost of a paid ticket or a room with the number of miles that award costs, in most cases you’re gives up earning miles too, and that needs to be backed out from the valuation when comparing to a cash stay.

The bottom-line is that a point which might buy 3/4ths of a cent worth of travel is not worth 3/4ths of a cent unless it directly displaces the cash you would spend today at that exact amount – you would have booked that room, at that same rate (and not a more discounted rate), and even then you’re giving up some points-earning in the process.

More likely, though, you’re holding the points for future use if you aren’t buying them for an immediate redemption. And there’s devaluation risk, time-value discounting, and the simple fact that points aren’t as flexible as money.

The question you want to ask it, if a point will buy 3/4ths of a cent in travel, would you spend 3/ths of a cent to buy that point? I certainly wouldn’t. After this discounting, I get to ‘about half a cent’ about a 40% total discount for these factors might be even more appropriate.