What is the Monetary Value of a Loyalty Point?

Discussion in 'General Discussion | Miles/Points' started by NYCUA1K, Mar 15, 2015.  |  Print Topic

  1. NYCUA1K

    NYCUA1K Gold Member

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    The question in the thread title is one that is much debated in the travel blogosphere, including here on MilePoint. My own view has consistently been that the best approximation of the fair market value of a loyalty point may be that which is set by the program that issues the point.

    I arrived at the above conclusion through some very simple reasoning. Take for example Delta Skymiles (SM). Each SM belongs to DL because they created this “currency” out of thin air and thus own it since it would otherwise have no meaning or value; DL gives SM its "value". This means that anyone who sells Skymiles for less than what DL thinks they are worth is a “counterfeiter” because they would have to manufacture their own skymiles in order to be able to sell them cheaper without losing money. It would also be a felony.

    Alternatively, one can do what AMEX does and purchase billions of $$$ worth of Skymiles, which they can sell cheaper if they wish because DL quite likely gave them a huge discount. The “resale” value of the Skymiles for AMEX, because there is a resale value, is known only to AMEX so that "value" at this point starts to become subjective. However, point sale transactions between a loyalty program and third-party entities seem like a good way to determine the fair market value of loyalty points.

    Well, is my view on this off the mark? It turns out that according to a document [PDF] prepared by PricewaterhouseCoopers(PwC) analysts entitled “Loyalty analytics exposed: What every program manager needs to know”, my view may not be too far off.

    Here’s the relevant bit:

    “Because of diverging accounting practices, International Financial Reporting Interpretations Committee 13 (IFRIC 13) was issued in 2007 (effective July 1, 2008) to provide more specific guidance and to bring greater consistency regarding the treatment of loyalty program liabilities. The two major concepts underlying the application of IFRIC 13 to loyalty program accounting are:

    1. The issuance of credits or points must be accounted for as a separate component of the sale. In essence, this requires a deferred revenue approach, whereby the income statement immediately recognizes the portion of revenue related to the sale of a good or service and defers the remaining revenue allocable to the value of loyalty points. This deferred revenue is recognized when the loyalty points earned at good/service purchase are redeemed, forfeited or have expired.
    [NYCUAK1K says: this is one of the reasons why loyalty programs devalue their points, promote the redemption of points by pushing all sorts of ancillary merchandises, or set an expiration date — all designed to decrease ‘liability’ and boost real profits]

    2. The process of calculating the amount of deferred revenue when issuing points must be based upon the FAIR MARKET VALUE of those points to the customer. This guidance means that a company must defer the value of the points (less expected “breakage”) according to the value that customers put upon them. In contrast, US GAAP allows an alternative approach for the recording of points at a value that is based upon the program sponsor’s internal cost of goods sold.

    IFRIC’s starting position for determining fair value is “the amount for which the award credits could be sold separately.” In practice, this definition can require significant estimation and judgment by management, particularly in the absence of significant sales of points to third parties. Where third-party point sales are significant, the cost of the points in the sales transaction is often the most appropriate and compelling evidence of the fair value of the points. In the absence of third-party point sales, the estimated fair value of the goods and services for which the points may be redeemed likely would be used to determine the fair value basis of the points.”
    [Emphasis added]​

    Got that? “Where third-party point sales are significant, the cost of the points in the sales transaction is often the most appropriate and compelling evidence of the fair value of the points.”

    As in the case of DL and AMEX, or Chase with pretty much everyone out there, loyalty programs do sell a whole bunch of points to various entities (banks, individuals, etc) from which they can estimate how much their points are worth monetarily. Therefore, the FAIR MARKET VALUE of a loyalty point is best approximated by the value which is assigned to it by its issuer, because it is estimated from “significant third-party point sales.” Any other "value" -- e.g. those peddled by most bloggers -- would be too subjective to have any practical or real-world utility or meaning...

    Chime in!
     
    Last edited: Mar 15, 2015
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  2. Wandering Aramean
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    Wandering Aramean Gold Member

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    That's the value the program must assign for tax and accounting purposes, not the value a consumer should consider. Saying that something which has a variable rate of conversion must be considered to have only one value is ridiculous.

    And your felony/counterfeiting assertion is ludicrous.

    ETA: Also, the point where this paper seems to be implying that the product is being sold at cost rather than at a profit makes no sense at all.

    If we're using the evidence of "significant 3rd party sales" as proof that the value should be tied to the sales price then the number used should be something much closer to the price used in those transactions - generally unpublished - than the retail price used for the mush smaller number of points sold to end-users directly.
     
    Last edited: Mar 15, 2015
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  3. gleff
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    gleff Co-founder

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    For accounting purposes the standard for determining how to book the value of points as deferred revenue looks to the actual price used in sales by airlines to their partners.

    That has nothing whatsoever to do with the value of points to consumers. It says that where there are actual market transactions (such as between United and Chase) you look the those real transactions rather than other estimates to come up with an objective way to determine the deferred revenue component of a transaction that accrues points.

    Accounting is full of estimates, is often overly scientistic, but the important thing here is not to confuse the value of points for financial statement purposes with the usefulness of those points.

    And definitely don't confuse the market transaction price between airline and partner (B2B, which varies across partners, largely a function of the volume of their purchases) with the price an airline sells miles or points to consumers at (which is wildly inflated usually).

    As I explain here:
    http://viewfromthewing.boardingarea.com/2014/12/07/value-of-miles-and-points-by-airline/

    The value of points:
    * Depend on how you redeem them
    * What you would have otherwise been willing to spend for those redemptions
    * Timing - when you are going to redeem them -- near-term redemptions are more valuable than redemptions in out years and require taking a discount for time and risk of devaluation
    * Depend on how many you already have -- miles that put you over the top for a specific redemption are more valuable to you than orphan miles or miles in an account that already has millions
     
  4. NYCUA1K

    NYCUA1K Gold Member

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    Like I said... Chime in! The more folks do, the more my point that any other valuation would be too subjective to have a real-world meaning will become clear.
    LOL. Because you say so?
     
  5. Wandering Aramean
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    Wandering Aramean Gold Member

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    No, because you've completely missed the point of that article and are conflating multiple topics in an effort to "prove" a point which doesn't actually exist.
     
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  6. gleff
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    gleff Co-founder

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    And ultimately value is subjective. That's a basic premise in economics, estimates and averages that are useful abstractions notwithstanding.

    When I offer valuation estimates I think I offer all the usual caveats.
     
  7. NYCUA1K

    NYCUA1K Gold Member

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    I'll buy this because much of what you said in your prior post determines the value of points is ultimately subjective and dependent on individual circumstances.
    You missed the point. They are two sides of the same coin!!!

    I did this exercise a long time ago and will try to dig up the post. Suppose your yearly travel budget is $12K, as is mine based on making HH Diamond on spend. Armed with $12K, calculate how many nights you'll be able to redeem at each program's top redemption rate and then compare that with my prior analysis based on free nights from points derived from revenue stays... then call me in the morning.
     
    Last edited: Mar 15, 2015
  8. Wandering Aramean
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    Wandering Aramean Gold Member

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    Why?

    Redeeming at the "top redemption rate" is not part of my travel pattern nor is reaching to tier in any hotel program. Because there the value of that transaction is not worth the expense to me. As I've said for many, many months now, pretending that your views represent those of others is ridiculous. But, by all means, feel free to produce another spreadsheet "proving" that I'm wrong about that.

    Besides, there are other benefits to status than just the points, something the calculations described in the paper or by you in your many, many posts on the topic ignore. Someone may choose to value free breakfast in the hotel based on the $40/person MSRP of dining in the restaurant downstairs. I would never put a number that high on it. And yet you're suggesting that we have the same metrics by which we should define value.
     
  9. NYCUA1K

    NYCUA1K Gold Member

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    Top redemption rate for simplicity and maximum "effect size", but, again, things will scale up and down the award charts.
     
    Last edited: Mar 15, 2015
  10. Wandering Aramean
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    Wandering Aramean Gold Member

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    When you start with silly assertions like this it is quite easy to see the rest of the discussion fall apart quickly.
     
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  11. NYCUA1K

    NYCUA1K Gold Member

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    Give me a break! Who is being silly?! You've talked big like that before without offering anything to back up the big talk, often just ending up exposing yourself as not knowing what you are talking about. If you are arguing for the subjectivity of the "value" of loyalty points, then we have no argument because that is precisely my point about the valuations that are being peddled as the established monetary values of loyalty points. To get at the monetary value, the best indication must come from those who create and sell the points because those transactions do take into account many of the subjective factors that inform the decision by banks or individuals of whether or not to purchase points, which would not exist at all were it not for those who created them.
     
  12. gleff
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    gleff Co-founder

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    Saying that point values are subjective is not the same thing as saying any valuation is valid. It means that what you're able to get with the points will be valued differently by different consumers. We can still talk about ranges and average cases. We just need to appropriately caveat claims.

    I do think it's fair to say that the value of a point for any given individual is the point at which that person is indifferent between holding cash and holding points. So unless you're willing to pay $x.xx for an incremental point, that incremental point isn't worth $x.xx.
     
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  13. Wandering Aramean
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    Wandering Aramean Gold Member

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    That's how price is set, which is not necessarily the same thing as value. In fact, often the two are not the same.

    And you still haven't addressed the point that using the retail sale price to end users is the wrong number based on the article you've cited. It suggests using the price point for large 3rd party transactions, a number which is almost never made public.
     
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  14. gleff
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    gleff Co-founder

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    I think the relevant distinction is between value to consumer and the B2B value. The market price reflects the minimum value that the B2B purchasers believe they're getting at the time of the transaction. Of course that's not even average value across all businesses who would contemplate a purchase (as it doesn't account for all of the businesses that found the price too high and chose not to buy).

    That just brings us even further away from believing that the price a loyalty program sells points B2B is even suggestive of the value that any consumer is likely to get from those points of course.
     
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  15. MX

    MX Gold Member

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    All these debates are due to the fact that "fair markets" are expressly forbidden by all point issuers. I know it's a "duh" statement, but may still be a useful reminder. :)
     
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  16. gleff
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    gleff Co-founder

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    Sure, if you could freely buy and sell points there'd be a transparent market value. That still wouldn't tell you how much any individual should value the points (some will value them at a higher amount than the price, and will be buyers up to some point, and others will value the points less and won't buy). But it would tell you the most you should pay if you're going to pay, at a minimum.
     
  17. Counsellor
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    Counsellor Gold Member

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    Three comments:

    1.
    Nonsense. If I sell you a dollar bill for 95 cents, I haven't "counterfeited" the currency, I've simply made you a bargain sale. Similarly, some grocery stores used to (and may still) sell postage stamps at a discount to face value. They haven't "counterfeited" the stamps, they're simply selling them below cost (as a "loss leader") to attract you into the store.

    2.
    Not "real" profits, accounting profits.

    3.
    I think you misunderstand what they're meaning by "third-party point sales". They don't mean "sales by the issuer" but rather "sales by third parties." That's a term for "secondary market" which the issuers claim shouldn't exist, but which would show what an independent third party seller could get for the mile from an independent third-party buyer, i.e., an "arms-length transaction" or -- in simple terms -- the market price.

    I think the key sentence is the one following the one you cite, i.e., "In the absence of third-party point sales, the estimated fair value of the goods and services for which the points may be redeemed likely would be used to determine the fair value basis of the points.” That is essentially the way I (and most consumers) determine how we value the points and miles issued through the various loyalty programs -- by what they will buy us or save us.
     
  18. NYCUA1K

    NYCUA1K Gold Member

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    Let's inject some signal in a discussion that is increasingly getting noisy. People talk about the "value" of points without really defining what they mean by that.

    First, loyalty points have a monetary or fair market value when they are earned or purchased, and then they have a largely subjective or nebulous 'value' when they are redeemed, which is harder to estimate monetarily.

    In terms of acquiring the points at market value, each loyalty program decides what the fair market value of their points is, and that is what this post was really about. Because they manufacture the "currency", the loyalty programs own it. Period. When I do a revenue stay at a Hilton property, I would pay $x, and if I am a HHonors member I would earn Y HH points. For Hilton, their revenue from this stay will be $x minus the monetary value of the Y HHonors that they awarded me for the stay. The Y HH points are a "liability" for them, because their revenue from that stay will be deferred revenue that will be recognized only when the Y HH points I earned are redeemed, forfeited or have expired. Note that here we are still dealing with real money that is on the loyalty program's books. For honest accounting, a loyalty program must come up with a fair market value for their points. That is where “third-party point sales are often the most appropriate and compelling evidence of the fair value of the points.” It is how a loyalty program is able to set a fair market value for their points, which is their basis for figuring out their total "liability" as well as for marketing their points for general purchase (e.g., through a dedicated website).

    A concrete example is that if I go to the Hilton website, in the absence any discounts, each HHonors point would cost me 1 penny. That is what Hilton estimates the fair market value of their points to be. So, for folks who set the "value" of a HHonors point at less than 1 penny, are they referring to the fair market value or to some subjective value. I believe that is where the confusion lies, because for anyone to sell HHonors points for less than 1 penny when Hilton, who owns this "currency", is selling it for 1 penny each, the reseller would have be a "counterfeiter" or be willing to sell the point at a loss. There is a third way, of course, which is to purchase the points from the loyalty programs, very likely at a huge discount because of volume purchasing, and resell them at a discount. That is the only way it would make sense for anyone to set the value or sell HHonors points for less than Hilton thinks they are worth monetarily. A loyalty point is created out of thin air by each program, which is free to set its monetary value. To think otherwise to delude oneself.

    In 2014, I spent $12K on revenue stays at Hilton properties and earned 700K redeemable points for the year. This means that, grossly, I had paid $12,000/700,000 = 1.7 cents for each redeemable HHonors points. One obvious question that can be raised is why would anyone pay 1.7 cents/point when Hilton sells each for a penny on their website? Would I not get better value by using my $12K and purchasing points directly from HHonors for a penny a piece, which would get me $12,000/$0.01/point = 1,200,000 points rather than the 700,000 that I got? The answer is no, because loyalty points are worth much less when they are redeemed, and that is the other side of the equation and another definition of "value".

    Because loyalty points are worth a lot less when they are redeemed, it is a lot more efficient to earn them as part of spend that one was going to do anyway. Doing so, in fact, magnifies the "value" (both objective and subjective) of each point because it becomes part of something that is a lot bigger than just the points themselves. The whole, so to speak, becomes bigger than the sum of its parts (aka “gestalt”). Not only that, one’s spend in hard cash stretches even further when coupled with other programmatic elements like elite or promo bonus points that each program offers.

    For instance, a general HHonors member spending $12K with no elite or promo bonus points would earn only 120,000 points, which, at 10 points/$ or10 cents/point, is awful. However, if he or she selected double-dipping, a GM would add an additional 50% of 120K to their earning, thereby stretching their spend. If they then add points from various promos that are offered throughout the year and pay for their stays with a co-branded CC, then their spend stretches even further.

    As a HHonors Diamond who is set up to maximize my earning (elite bonus, double-dipping, co-branded CC), I would earn 32 HH points/$ from each stay. So, for my $12K spend in 2014 I earned 380,000 HHonors points. However, my total haul for the year was 700,000 points. This means that various promos had contributed nearly 50% to the total, tremendously stretching my spend. Along the way, I was upgraded to a suite 12 times out of 12, which is "value" that I could incorporate into it all and come up with a pretty good estimate of what the points that I'd earned are worth monetarily. But, as the preceding makes absolutely clear, estimating the objective value of loyalty points is a highly complex exercise because it has two sides: the earning side and the redemption side. What the bloggers mean when they provide estimates of the "value" of various loyalty points is unclear. The only thing that is clear is that their estimates, if they mean anything at all, would apply only to their specific set of conditions and assumptions. That is why such estimates have little practical utility or "value". In fact, few people who play the mile/point game micromanage the value of each point, as it is usually a futile exercise. One usually goes with what feels “right” at the time based on personal goals. I ought to know. I do a Big-Time Redemption every year and I seldom worry about what a HHonors or Hyatt GP point or UA mile is worth by any definition. I just do it!

    The most effective way to assess and compare loyalty points, is not by using or quoting some nebulous "value" of the points, but by estimating the objective value of awards that one can derive from one's spend because only then are both the earning and redemption sides of the point/mile equation taken into account.
     
    Last edited: Mar 17, 2015
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  19. eponymous_coward
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    eponymous_coward Gold Member

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    Of course you wouldn't be getting better value purchasing points from Hilton with $12K instead of hotel rooms, because your $12K also purchased hotel rooms along with the points (unless the 500K surplus would have paid for those $12K in hotel room stays, which is not very likely).

    Worth a lot less than what? A penny a point from Hilton?

    OK, if so, then why do I care about anything other than the value of the points towards what I wish to redeem them for? Why isn't the value of the effective rebate I get on hotel rooms a way of ascertaining "value"?
     
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  20. NYCUA1K

    NYCUA1K Gold Member

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    We agree...
    This should be obvious: The "purchasing" power of points will be much less than the purchasing power of the hard cash used to get them -- for the very reason you gave above.;) All my revenue stays in 2014 cost me $12K, which included a 9-night stay at Conrad Hong Kong (standard award rate 80K HH points/night). If I had purchased 1,200,000 points with the $12K, I would have depleted 80,000x9 = 720,000 or 60% of the points on just one stay. I had several stays of at least 5 nights after that, each of which would have required about 50K points. I would have been way short on points only compared that what I got with $12K in cash.
    Personally I do not care at all. I just do it. But for those who throw numbers around one should care because points must come in before they can be redeemed, so there is a real cost associated with those points, which cannot be ignored. I believe what bloggers do is similar to what you say should be sufficient, but it can be done accurately only on a case-by-case basis and after one has completed the redemption, because almost everything requires a decision that is highly subjective. Do I redeemed for an aspirational stay at Conrad Koh Samui at 95K/night or for Hilton Chongqing at 15K points/night? Do I even have the points? Then during the actual award stay you get upgraded to a suite and the "value" increases [you could not have predicted the upgrades ahead of time], and so on. These things can be estimated only after the fact. Just for fun, I will try to figure out the total "value" of my 2014 Year-end Escapade since I did the deed and I have almost all the numbers.
     
    Last edited: Mar 17, 2015
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  21. eponymous_coward
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    eponymous_coward Gold Member

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    The bloggers admit that.

    I'll say this, though; I've gone through and looked at what I'd get at Hilton properties I typically stay at to accumulate points, and done a "what would happen if I burned points instead? What would I be getting in cpp value?" exercise.

    It's not very far from 0.4 cpp. Right around there. Hmm, that figure sounds familiar...

    And the bloggers are quite careful to say that you can exceed that figure all the time. I agree with that; it can be done. But an 0.4 cpp value for Hilton as a ballpark "exceeding this value for a redemption means you're starting to get good value for your points, below it isn't very good" doesn't seem out of scale with my experience.
     
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  22. NYCUA1K

    NYCUA1K Gold Member

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    The value could well be around 0.4 cpp (I think that I would do better but we'll see after I crunch the numbers), however the estimate (a) is incomplete because it does not consider the costs associated with getting the redeemable points and (b) even if we ignore the point acquisition costs, the distribution of individual redemption values simply must be considered before it can be concluded that the mean of such a distribution is about 0.4 cpp for HHonors. What is the shape of the distribution? Is it a perfect unimodal Gaussian or bell curve? Is it bimodal or multimodal with a mean for each elite tier to reflect the relative earning abilities?
     
    Last edited: Mar 18, 2015
  23. NYCUA1K

    NYCUA1K Gold Member

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    Some quick numbers to show how high redemption values can easily get. I plan to be at Conrad Koh Samui on New Year's eve 2015. The room rates in points and $$ are given in figs. below.
    Top picture shows the rates for a GM. The standard room goes for $988 or 95K HH per night, yielding exactly a redemption value of 1 cpp. Notice that 1 cpp is also exactly how much it would cost to buy HH points from the Hilton website.

    Now if you decide to do what I will do and book a 5-night stay at this aspirational property, something wonderful happens. The standard award room rate drops from 95K to 76K [ bottom fig.], which is exactly 20% off due to HHonors' 5th award night free for elites policy.

    So, for 5 nights at Conrad Koh Samui, the following rates will be available:
    • in hard cash: $988 for best available rate * 5 = $4,940
    • in HH points with 5th night free: 76,000 * 5 = 380,000 HH points
    • in HH points without the 5th night free: 95,000 * 5 = 475,000 HH points
    What are my redemption values?
    The redemption "value" of my HH points for just that one stay with the 5th night off will be = $4,940/380,000 = $0.013/point = 1.3 cpp.
    The redemption "value" of my HH points for just that one stay without the 5th night off will be:$4,940/475,000 = $0.010/point = 1.0 cpp

    The "fair market value" for purchasing HH points at hhonors.com is 1.0 cpp

    Bottom line:
    With the 20% discount the purchasing power of my redeemable HH points is 30% higher than the power of HH points I can purchase at fair market value or 300% higher than the "average" redemption value of 0.4 cpp for HH points peddled by the bloggers

    upload_2015-3-18_16-6-5.png
     
    Last edited: Mar 18, 2015
  24. eponymous_coward
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    eponymous_coward Gold Member

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    I'm not doing a full statistical analysis. This is more a useful heuristic of "I should try and beat that if I want to cash in HH".

    The problem with doing full costs is that we start getting into "well, the alternative replacement value for your hotel really isn't always the cash cost of Hilton Honors hotels, it could be Pricelining/Hotwiring using cashback portals, or maybe hotels.com with cashback portals at comparable star levels, if you're willing to ditch status". (This applies to Hyatt/SPG/etc. as well.)

    This is why @Wandering Aramean goes for something like the latter strategy. I often do that as well during my travels; Hilton works sometimes for me, sometimes it doesn't (I don't see a reason to pay a premium for Hilton properties a lot of the time, even with potential rebate value for points I'll earn). Sometimes other chains give nice promos (one two day stay in an Accor property in 2014 netted me 3000 Avios and Accor Silver status because of chained promos, got a nice suite for $125 a night in Bangkok). Sometimes Priceline/Hotwire or independent hotels work out best (even with Hilton's massive footprint).
     
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  25. MX

    MX Gold Member

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    I'll follow up on my earlier point about the terminology, that you had ignored. Since fair markets for points do not exist, the fair market value is a hypothetical number at which HH points would trade for USD. That's a more nebulous quantity than the redemption value, not the other way around. Redemption values can be readily calculated, and I saw you cited 0.4 ccp as a currently representative number. If that's the case, then the hypothetical market value would be much lower than 0.4 ccp. That's because USD are universally accepted, and HH points are only good for hotel stays in just one chain (and can be devalued or canceled at its whim).
     

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