The valuations provided on Pointsreckoning.com are the opinions of the site and its affiliated staff only. No guarantee is made that an individual will be able to redeem points in a manner that equals or exceeds our valuation estimates. No bank, credit issuer or other institution endorses, or has any input, on our valuation methods. We reserve the right to alter our valuation method at any time, without notice. All award currency estimates are in United States Dollars.
How We Value Airline Miles
At Points Reckoning we value points at what we call the “Average Consumer’s Redemption Value”, or ACRV. To us, this means that although some exceptionally lucrative redemption opportunities exist, the average, points and miles semi-savvy consumer is unlikely to realize them.
With the above in mind, we take a standardized basket of hypothetical redemption’s, price them at the lowest cost cash alternative(CA) and divide by the amount of reward currency(RC) necessary to redeem. The average of these redemption’s is called the Points Reckoning Estimate(PRE). Furthermore, we reduce the PRE by 25% for non-transferable(or minimally transferable) currencies(the RF). This reduction is to compensate for the lack of miles earned on award redemption’s, the inflexibility of award travel when compared to cash, and the risk of future devaluation. All pricing data is obtained from publicly available sources. The resultant ACRV is what we would pay for the point/mile if it were offered for sale.
We choose to use the lowest price cash alternative because airline flights are semi-generic. This of course, is not to say all airline flights are the same. Hardly anyone would consider China Eastern and Cathay Pacific comparable carriers. However, we do believe that for the purposes of valuation, most airlines are similar enough, especially over competing routes. One further note: For the purposes of obtaining the CA, we do remove ultra-low cost carriers(Spirit, Allegiant, etc.) from our data.
Finally, we further break down our valuation as it pertains to travelers who typically travel domestically vs. those who primarily travel internationally.
Airline Example(for illustrative purposes only)
Assume we’re attempting to place a value on Delta Skymiles. Our research tell us that the lowest cost non-stop(or reasonable single-stop) business class one-way ticket from LAX to LHR costs $4,397.00. It does not matter that the lowest cost cash alternative is, or is not on Delta, since this would likely have a minimal impact on the cash purchaser’s decision, assuming the product was comparable. Let’s also assume that Delta is requiring 137,000 Skymiles + $5.60 in fees to book this flight as an award. The calculation would be ($4397.00-5.60)/137,000, for a redemption value of $0.032. We then reduce this by 25%(to .024). This would of course be repeated a number of times in an attempt to minimize the impact of extremely lucrative or extremely poor redemption values.
How We Value Hotel Points
Unlike airline flights, hotels are not semi-generic. That is to say, one cannot simply pick a date and city and come up with a cash alternative price. Each property is unique and we must keep that mind when valuing points. This actually makes hotel calculations a bit easier. We simply have a standard basket of global cities, take the cash price of specific hotels less fees and divide by the amount of reward currency required to book. To keep everything standardized, we always use the lowest priced, advance purchase room with a king sized bed. Just like with airline miles, we do reduce the resultant figure by 25%. Again, this reduction is to compensate for the lack of points earned on award redemption’s, the inflexibility of award travel when compared to cash, and the risk of future devaluation.
Hotel Example(for illustrative purposes only)
If we were attempted to place a value on Starwood Preferred Guest’s Starpoints, we might look towards the W Miami. The average room rate(including taxes/fees, over a week long period) is $425.00. This room can also be booked for 17,142 Starpoints. Our value would simply be $0.0248. This would then be repeated a number of times in an effort to minimize the impact of extremely lucrative or extremely poor redemption values. Finally, we’d reduce this figure by 25%, to achieve and ACRV of $0.0186.
How We Value Transferable Currencies
This is where things start getting tricky, but here is the basic premise. Transferable currency valuations are derived from the valuations placed on their transfer partners. However, it’s not a simple average. Doing so would ignore the fact that people are more likely to transfer their valuable points to a high value partner than a low one. To compensate for this, we weight higher value transfer partners more than lower value ones, using a linear scale. Below is an abstract example:
How we’d find the weighted average of a series, 1-10:
In this hypothetical scenario, the simple average would be 5.5. However, this is unrealistically low. Assuming that 10 is more valuable than 9, it would follow that it’s more likely to be chosen. To compensate(or at least attempt to), we first assign a weight to the value based on it’s percent of the series’ total. For example, 1 is 1.82% of the series’s total of 55, and 10 is 18.18%. We can then produce the following chart:
|Value||Weight in Series||Weighted Value|
As you can see above, the weighted average is 7, which we consider a more realistic valuation than 5.5(the simple average).
Furthermore, we remove the 25% reduction applied to each transfer partner’s valuation. This is done to compensate for the fact that
- Transferable currencies are inherently less restrictive to use than award currencies
- By holding a transferable currency, you’re diversified against any one currency’s potential devaluation
- You’ll typically have the ability to “cash-out” providing ultimate flexibility, albeit at generally unfavorable rates