Service Based vs. Value Based Rewards
Spend as much time as I do looking at different reward credit cards, and you start to see patterns. Not the spooky patterns where you read the first letter of each word and it spells out a secret message to you. No, I am talking about the value of the awards relative to their normal cost.
I have decided that all awards are either Service Based, or Value Based. Allow me to explain:
Service Based Awards
These awards are based on a service being performed, and they have no fixed relationship to the value, or normal cost, of the service. They typically involve a service with a low marginal cost and a fluctuating price. The classic example is an airline seat. The marginal cost, the direct cost of the service provided, is often close to zero, unless when the aircraft is going to depart %100 full. If the seat would have otherwise been empty, the airline’s direct cost of offering the award seat is only a small amount for the extra fuel needed for the trip, and perhaps some minor food costs.
You, on the other hand, are receiving a product of variable value. The domestic round trip award might be worth as little as $59, if it is for a short flight between two nearby cites served by Southwest Airlines, or well over $1,000 dollars to travel between to minor cities on opposite ends of the nation.
Premium International travel awards typically have both the highest value and vary in price more than any other award. Some first class tickets on foreign carriers cost tens of thousands of dollars! Even a transoceanic business class ticket can easily cost as much as a late model used car.
Other service based awards can include car rentals, hotels, rental cars, and other types of travel services.
Value Based Awards
The other class of awards are value based. These awards offer a product or service at a fixed or maximum value, in return for points at a fixed redemption rate. When merchandise is being offered, it is easy to calculate how many dollars per mile or point you are getting. Typically, this calculation applies equally to almost all items from a few dollars in cost, to big ticket awards that can be worth thousands of dollars. For example, the Sony reward for a 26″ flat panel television is 59,999 Sony points, while the product itself can be purchased directly from Sony for $549.99. Essentially, you are getting just under one penny per point. The same is true for their PlayStations as well as the rest of their product offerings. In the case of Sony, the point value is fixed, although you do receive more points on a Sony card when you purchase Sony products. The number of points received per dollar spend varies on where you their products, with online purchases earning the most points per dollar.
Value Based Travel Awards
These value based awards are becoming more and more popular. For example, Bank of America WorldPoints air travel rewards have fixed, predefined values. Their 25,000 point reward is good for a domestic ticket, so long as the ticket has a maximum value of a mere $400. Obviously, the value of that award is always less than 1.6 cents per mile. Other award programs like Citi’s Thank You rewards offer travel certificates for hotels and car rentals at a pretty strict 1 cent per mile in value.
Which Is Better?
You will typically receive far more value from Service Based awards than Value Based awards. As I have consistently shown, one can maximize the value of an airline award ticket or a hotel room far beyond a mere one or two cents a mile. Savvy award travelers can book awards way in advance to capture seats or rooms that return award value of up to six cents per mile. The idea is that the average award redeemed is valued at less than six cents per point/mile, but there is no reason that you have to be average. Sure a New York to London flight might be found on sale for $599, but you don’t use your award ticket to Europe for that trip. Save it for your Sacramento to Zagreb trip that would have cost $3,000. The point is that with service based awards you have the opportunity to hold out for a high value redemption. With value based rewards, there is a fixed exchange rate, and little if any opportunity to go beyond it.
When Do Value Based Rewards Make Sense
Value based rewards still make sense for some people. If you need to get rid of orphan miles or points in a system that you are no longer using (United MileagePlus?), then you can often just get rid of them on a small, value based award such as a newspaper subscription, or a trinket in their “mileage mall”. Otherwise, I prefer to skip value based rewards and focus on cash back cards.
The only real way to maximize value based awards is by maximizing the points received per dollar spent. Sony’s .9 cent value per point might seem bad, but if you were going to spend a few thousand dollars on their merchandise at SonyStyle.com, then you would get 5 points per dollar spend. When you redeemed the award, you would then be getting about a 4.5% return, which is not bad.