Are points worth what they buy or what they save?


If your employer offered to pay the next $1,100 you earn in pizza, what would you say?

Unless you work at a pizzeria and they’re offering to let you sell your pizza share or something, you’d probably be skeptical at best about choosing pizza over cold hard cash. Why? That’s a silly question, but the obvious answer is that you can’t pay the mortgage with pizza, you can’t buy clothes with pizza, etc. The pizza isn’t worth as much to you as cash. Choosing pizza over cash is obviously absurd.

Yet we choose to earn points over cash every time we take out a card that earns something other than cash back. It would only make sense to make that trade if you had a way to turn the pizza points into something more valuable to you. Thankfully, points can be turned into travel that is much more valuable…but how valuable? Do you base the value of your points on what they can buy you or what they can save you? It’s important to find a value, but how?

Valuing points based on what they can buy

On Tuesday, I wrote a post about why you’re better off using a cash back credit card and buying Hilton points with your cash than you are using a Hilton credit card on everyday purchases (See: Does it ever make sense to spend on a Hilton card?). In that post, I used the Conrad Tokyo as an example of a valuable Hilton redemption. The Conrad was charging over $1100 per night or that same room could be booked with 95,000 Hilton points.

  • Conrad Tokyo Cash Rate = $1,162
  • Conrad Tokyo Award Rate = 95,000 Hilton points
  • Value of Hilton points =  1.22c per point….?

Based on the numbers, this redemption yields 1.22 cents per Hilton point.

But I also noted that I don’t truly value a redemption that way since I’d never be willing to spend $1100 on a room for one night. While I didn’t say it in the post, I would be more likely to value my points based on the highest rate I would be willing to pay.

I was challenged in the comments on that post by a couple of readers. The basic premise of their argument was that the room sells for $1100 and I can use points to buy that $1100 item. Therefore, I’m clearly getting $1100 in value from the points. One reader challenged me by saying this: Suppose a particular Porsche sports car costs $100,000. Next suppose that I’m only willing to spend $30,000 on any car. Is the Porsche only worth $30,000? The argument here is that the value of the Porsche has nothing to do with what I’m willing to spend on a different product or my unwillingness to buy the Porsche. It’s still a $100K vehicle regardless.

And indulging that line of thinking for a moment, if I were able to use my $30K to buy something the Porsche seller really wanted and then trade that something for the Porsche, would I not tell all my friends about the amazing deal I got on a $100K Porsche? It certainly wouldn’t be known as my $30K Porsche. Is the room at the Conrad Tokyo any different? If I have points that the hotel is willing to accept in trade for their $1100 room, did I not get $1100 worth of hotel room for my points?

And so sprouts the argument: do you value your points based on what they can buy? I mean, we value our money based on what it can buy us, right? When the cost of living goes up, we want a raise in salary so we can continue to buy the same stuff. We choose to be compensated by our employers in money based on what that money can buy us. We wouldn’t accept less than enough to buy the stuff we want/need to buy. If we value our money based on what it can buy, why wouldn’t we value our points based on what they can buy?

Valuing points based on what they can save you

My argument in response was that I generally prefer to value points based on what they save me from spending. I’m no Scrooge McDuck, but I’d rather hold on to my money when I can.

In the Tokyo example, I said (in the comments) that I’d probably be willing to pay about $200 per night for my hotel. Using points saves me $200 per night — it keeps that money I’d have otherwise spent in my pocket.

Further, I wouldn’t buy the $1100 room because, like the pizza example at the top, it just isn’t more valuable to me than the money.

I’m not saving $1100 since that money never would have left my pocket in the first place. If my choice were to spend $1100 per night or not go to Tokyo, I’d be spending my nights at the Chateau Reyez. So while 95K Hilton points will get me a room that’s being offered for sale for $1100, I wouldn’t say I’m getting $1100 in value out of the points.

That should be obvious for a few reasons. First, I can’t buy $1100 worth of stuff with the room. I can’t pay the mortgage with a room at the Conrad Tokyo, I can’t use the room to buy clothes, I can’t pay the light bill with nights at the Conrad Tokyo. That room isn’t worth the same to me that $1100 is worth. And I’ll mention a big difference with the Porsche here: I can resell the Porsche at any time for some value. The room expires as soon as the reservation date passes (and that’s to say nothing of the logistics and viability of selling the room to another traveler, etc). Of course, you could make that type of argument about a room at any price point or extend it to any type of perishable food, etc. Is nothing in the world worth its price tag price? I’m not arguing that. I’m noting why the points aren’t worth $1100 to me. I’m not trading the points for the opportunity to keep $1100. I’m trading the points for the opportunity to keep $200. So is my value for 95K points $200?

Am I comparing apples to oranges?

Is the Conrad Tokyo room only worth what I’m willing to pay for a room at the Motel 6 in the suburbs? Does the fact that I’m a cheapskate affect the value of the room itself? That doesn’t seem reasonable. That was really the heart of the Porsche argument: it doesn’t seem reasonable for me to value A based on what I’m willing to pay for B.

But really, in my argument against overvaluing my points, I’m not even concerned with the argument as to how much the $1100 room is really worth — I’m not arguing that the room isn’t worth whatever the Conrad’s customers are willing to pay. I’m saying that it doesn’t make sense to me to value my points based on the fact that they can buy that room. I believe that for a few reasons:

  1. I can’t trade the points for $1100 and use that money freely. They are locked to (in this case) a very specific type of use: Hilton hotels.
  2. Using them doesn’t save me from spending $1100 cash since I wouldn’t have spent $1100 cash.
  3. There are cheaper alternatives I’m willing to accept in this room’s place. This goes along with #3. I’d be fine with a $200 per night room in Tokyo. If $200 is an acceptable alternative cost, it doesn’t make sense to be to value the points used at more than 5x that acceptable alternative.
  4. Valuing my points based on ideal redemptions ignores all of the times I redeem them sub-optimally. I don’t make a habit of suboptimal redemptions, but they are a reality of the game sometimes. Creating a habit of making myself overvalue points will lead to poor decisions in terms of earning them.

So do I value the points at exactly the money they saved me — in this case, $200 per night? I don’t necessarily think that’s a fair valuation, either. I’ve stayed at the Conrad Tokyo and I’ve stayed at $200-per-night hotels. The Conrad Tokyo is definitely much nicer. I enjoy staying in fancy hotels (and flying in first/business class, etc). That enjoyment factor is part of what makes this world of miles and points appealing. If I could book either the Motel 6 for $200 or the Conrad Tokyo for $200, I’d obviously choose the Conrad Tokyo. If the Conrad Tokyo were charging $250 per night, I’m sure I’d choose that over paying $200 for the Motel 6. Even if they were charging $300 per night, I’d probably make that choice over the $200 per night establishment. But what if they were offering me a special promo code for 50% off: would I spend $550 per night over spending $200 per nice at the Motel 6? I personally wouldn’t.

And so I don’t necessarily think we should value our points based on the direct alternative cost we would accept, I do believe in valuing my points more conservatively than the cash cost of the room when that cash cost is so far out of line with what I would ordinarily consider.

A good method for measuring your redemptions

Our Reasonable Redemption Values are based on the value you can reasonably expect to get for your points without too much effort at maximization. The hotel point values are based on data from about 14 months ago comparing redemption costs at a wide range of properties. (Airline values are explained here and here). That’s a good baseline for what you can expect.

In Stephen Pepper’s recent post about his best redemptions of 2018, he created a formula that makes a lot of sense to me:

Average nightly rate / net cost in points per night / Reasonable Redemption Value

In this way, we compare the per-cent value based on room rate to the Reasonable Redemption Value. I’d like to collect my points based on the RRV and then use them at better-than-RRV.

In the Conrad Tokyo example, it would look like this:

  • $1162 room rate / 95,000 points per night = 1.22c per point
  • 1.22 / 0.45 RRV = 2.71x Reasonable Redemption Value

In the case of the Conrad Tokyo, I’m getting well over the Reasonable Redemption Value in comparison to the cost of the room. That makes it a good Hilton redemption and that’s why I would consider using my points there. I’d rather get a good redemption in Tokyo than an average redemption in Fredericksburg, VA.

Measuring redemptions over valuing them

The more I got to thinking about the two sides of this argument, the more I realized that I prefer to measure my redemptions rather than value them. I prefer to earn points based on their Reasonable Redemption Value — that is to say that I wouldn’t use a Hilton card at 3x since the reasonable value for that is only equivalent to 1.35% back. I like to use my points at greater-than-RRV. I place greater emphasis on getting a good deal than I do on cash value.

The same goes for airline miles, etc. I’d like to redeem at better than the RRV and make sure that I’m earning at or better than the earn on a 2% or 2.5% cash back card.

But it bears repeating that I like to make sure I’m earning at or better than the return on a cash back card — and that to me is the danger in overvaluing points based on optimal redemptions. If I value the redemption side based on the cash cost of the room/flight, I might start fooling myself into accepting suboptimal value on the earn side with the justification that I’ll redeem for greater value.

If I begin valuing, as a different but related example, 1 Ultimate Rewards point more than 2 cents, it leads to trades on a small scale (accepting 1 point for this $1 purchase instead of 2.5 cents) that become big trades on a large scale (100,000 points instead of $2,500 cash). I might fool myself into thinking it doesn’t really matter whether I spend on a card that earns 1x or 1.5x since I’ll redeem 100,000 points at huge value either way. In reality, there is a large difference in opportunity cost. Check out the numbers:

  • $100,000 spent at 1x = 100,000 points
  • $100,000 spent at 2.5% cash back = $2,500
  • $66,666 spent at 1.5x = 100,000 points
  • $66,666 spent at 2.5% cash back = $1,666

The opportunity cost of choosing points over cash back drops significantly when you jump from earning 1x to 1.5x. To me, it’s important to keep that in mind. If I value my points based on redemptions, I might be tempted to say it’s OK to earn 100,000 points at 1x since I’m going to use them for a $10,000 first class flight. The reality is that by accepting that mentality, I accepted an increased opportunity cost to the tune of $834. In the end, my conservative slant on redemption valuation is in large part to protect myself (and readers) from justifying poor earning decisions.

Bottom line

This post doesn’t really answer the title question, and it shouldn’t. The way that I value my points and my use of those points won’t necessarily be the same as your value. That’s why we have the Reasonable Redemption Values — to give you a good idea of a reasonable value so that you can determine whether or not you’re getting a deal. I think that determination is one key, but it needs to come with a focus on making sure that your earnings aren’t coming at a higher opportunity cost than you’d like. Remember that you’re accepting a trade on the earn side: points for cash. Make sure that it’s buying you enough that it makes sense/cents.

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