As this is the first post of this series, let’s take a moment to explain what the heck it is we’re doing here. According to Wikipedia (which means we’ve all agreed it’s true and therefore it must be) the position of Devil’s Advocate originated with the Catholic Church during the process of canonizing saints. The Devil’s Advocate was tasked with arguing why a particular person didn’t deserve to be a saint. Their job was to take a skeptical view, to look for holes in the evidence. (The church’s office of Devil’s Advocate was abolished in 1983, likely because the guy who had to do the job was tired of everyone rolling their eyes whenever he started to speak and never getting invited to any Congregation of Rites after-parties.)
But nowadays the term refers to someone who takes an alternative position from the accepted norm, usually in an effort to engage debate. Sometimes the Devil’s Advocate might truly believe in the counterargument. Other times he might take the opposing position just to see if the original argument holds water. But he’s always arguing the contrarian view.
That’s exactly what we’re going to do here each week. We’ll take a common piece of wisdom that’s generally accepted by the points and miles community and argue the opposite view. Along the way, we might find some of the conventional wisdom is correct. We might find some of it was correct at one point but has lost its validity over time. And we might find some of it is just plain wrong. Hopefully we’ll at least have some fun discussions in the process.
So where do we start? How about with this one…
Conventional Wisdom says when you redeem miles for travel, especially in first or business, you can’t calculate your redemption value based on the actual ticket price.
Here’s the logic behind this: if you needed to buy a ticket from, say, Chicago to Frankfurt and you’re not a movie star or having your trip paid for by your employer Googapplesoft, you’d likely opt to pay somewhat less than $10,000. You’d sit in premium economy or maybe even (gulp) economy, pay $853, and just suck up the fact that you weren’t eating caviar in a lie-flat seat for 9 straight hours.
OK. So what?
“Well,” the conventional wisdomers explain, “if you use miles to get a first class seat on that trip, you have to calculate your redemption value at what you would have spent instead of what you actually got. Or at the ticket’s value to you. Or some average of something or other.”
Really?
Let’s look at this using an analogy. Say you were in the market for a new car because you regularly need to get from Point A (home) to Point B (work). You’re looking at a nice $20,000 Hyundai because they’re sensible and reliable and you’ve moved into that period of your life where sensible and reliable is more important than trying to pay $500 for your buddy’s old VW Bug with a converted lawn mower engine.
But you suddenly discover that Delta, to make up for years of forcing the world to use their dysfunctional online award calendar, is launching a fantastic promo. You can use SkyMiles to get a Porsche 911. And the redemption rate is unbelievable – you can get that $100,000 Porsche for just 1 million miles! That’s a redemption of 10 cents per mile! You quickly head over to the dealership and drive home in your brand new Porsche.
Except when you get home, you admit to yourself that you didn’t really need the Porsche. You would never spend $100,000 on a car if you had to pay cash. You would have bought that Hyundai for $20,000. So you decide you only got 2 cents per mile for your redemption.
Do you see the problem with that logic?
You didn’t get a Hyundai. You got a Porsche.
The tangible good you received sells in the actual course of commerce at $100,000. It’s not a pretend price – they sell Porsches for that much. People or companies who can afford it willingly pay it. In our free market society, that’s what it’s worth.
So why would it be any different with your first class ticket?
The Devil’s Advocate says the ticket’s “value to you” or “what you would have done” shouldn’t have anything to do with your redemption valuation.
“No, no, no,” interrupt the conventional wisdomers. “You’re talking about a car. That’s a physical item you get to keep. Airfare is intangible. You can’t resell it.”
It doesn’t matter. Transportation is a service. Economic theory considers goods and services parts of the same continuum. Premium prices are charged for high-end services the same way they’re charged for high-end goods.
“OK, fine, Mr. Advocate,” the conventional wisdomers grumble. “What about this? You can’t claim full value for your redemption because you made compromises in your travel plans to get that redemption. Maybe you had to make an extra stop or adjust your travel dates. If you had paid cash, you could have taken a direct flight on the exact day you wanted.”
This argument assumes people paying cash never make compromises based on price and availability. Except everyone does. When you go online to buy a ticket, you’re presented with a variety of flights and corresponding prices that differ based on demand. There might be a 5am flight that costs $200 less than the 11am flight. But you don’t want to get up at the crack of dawn, so you pay the extra $200. Since you could have taken the 5am, do you value the cash you spent at $200 less because you received better service than was absolutely necessary to get from Point A to Point B? Or if you take the 5am, is your cash now valued at $200 more?
“Aha!” The conventional wisdomers now jump out of their seats. “But you can’t compare cash to miles, noob! Cash is infinitely more flexible. You can’t turn your 1,000,000 miles into $100,000, buy your precious Hyundai, and use the extra $80,000 in cash somewhere else. Your miles have to be used for travel.”
True, but that has nothing to do with redemption valuation. That’s currency valuation. When you choose to collect miles instead of cash back, you’re making a conscious choice to forgo 2% in infinitely flexible cash for much more restrictive miles. Why would anyone do that? Because if used properly, miles can give you a lot more bang for your buck. That $10,000 first class ticket would require $500,000 in credit card spend at 2% cash back, but only $110,000 at 2x United/UR miles. You’re trading flexibility for power right at the beginning when you decide to collect miles instead of cash. So why would you have to factor that tradeoff into your valuation again at the end after you’ve already redeemed for a first class ticket that you know for a fact will work in your schedule?
Perhaps one could argue there’s a difference between valuing miles at what you received versus what you saved. That assumes people use their miles exclusively to replace cash. If that’s you, then fair enough. But a great many people use miles to take trips and have experiences they would never be able to afford with cash under any circumstances. The experience isn’t just the destination. It’s the journey as well.
And isn’t that what the miles and points game is all about?
