There are few things in life with a larger divergence between price tag and perceived value than airline miles. If I'm willing to pay $5 at lunch for a sandwich, it's because I've decided that the value of that sandwich is worth the cost. Similarly, if I'm willing to pay $30,000 for a brand new car, I made that purchase because my valuation of the car is commensurate with that price tag.
It's been well documented and discussed by many (Lucky does a great job in a series of posts on this topic, the most recent of which is here) about the value of airline miles. In extreme cases, First Class airfare tickets can sell for as much as $20,000, and if that same seat is bookable using 160,000 miles, that puts the value of those miles at 12.5 cents-per-miles (CPM). But while I was willing to pay the sticker price for the sandwich and car in my previous example, would I really be willing to pay $20,000 for that First Class seat? Heck no. In fact, my personal valuation of First Class tickets is closer to 3X the cost of an Economy ticket on that same flight. That would bring the value of the First Class ticket in that example down to something like $5,000, and the CPM of that particular redemption down to 3.1 CPM.
I was inspired by a post I read over at Deadspin during the World Cup where they outlined how all of the potential scenarios of the US vs. Portugal and Germany vs. Ghana games would impact the US's advancement into the next round of the tournament. I really liked the way the chart was presented, which grouped each of the 121 discrete outcomes into just three color-coded scenarios.
For some reason, that chart popped into my head when I was recently searching for award availability, and mulling over the value I would be getting on each possible redemption. Similar to the chart above, my thought-process was a series of decisions based on discrete scenarios, but instead of looking at goal differential I was comparing CPM of various Economy, Business, and First Class redemptions relative to my desired or target thresholds.
I imagine that's a similar question many of you ask yourselves each time you want to use airline miles - "Is the CPM for this particular booking a good use of my miles?" The key here is that we can all agree that "good" is subjective, with some people valuing tickets using the actual sticker price, and others like myself, using something much lower.
Based on an illustrative person's valuation of miles, the chart below shows a sample cheat sheet of when that person should use miles vs. cash for flights. It also shows the situations when using miles, when that person should book Economy, Business, or First Class tickets. Each cell in the chart represents a discrete situation based on number of miles required for a flight (Y-axis) and the cost of the flight ticket (X-axis). Baked into the CPM thresholds outlined in the key on the right, is the value that this person has placed on their miles at each booking class, which again will differ from person-to-person, and even by airline program.
It's important to note that the chart isn't saying anything about the typical number of miles needed to make a booking at each class (I know that it would be rare to need 140,000 miles to book an Economy ticket). Instead, it's simply showing the break-points at which this person would find enough CPM value to make a particular booking. For example, if someone was offered Business Class tickets for 140,000 miles and valued at $4,000, they they would happily make that booking since the value exceeds their target thresholds. However, the value would be too low to be considered an acceptable First Class booking.
As I mentioned, the key assumption here is baked into the CPM thresholds, which is each individual's valuation of their miles. Personally, I value Business Class tickets at only 2X the value of Economy tickets, even though they can easily cost 3-4x as much. Similarly, I value First Class tickets around 3X the cost of Economy, while actual costs can easily be 6-10X as much. Therefore, I have a lower value on premium cabin tickets than the sample person above, and therefore would require higher CPM redemption values before willing to make the same booking, as illustrated in the chart below:
A couple of notes on methodology - I chunked the mileage redemptions into 5,000 mile increments, and the cost of flight tickets into $250 increments. While there is a clear line drawn between the colors, in reality there is a grey area between neighboring cells that cross into different colors. This would be especially prevalent in low mileage / low cost redemptions that you would find with domestic tickets.
So did I solve the million-dollar question "what is the value of airline miles?" Nope. But the value of this exercise for me was to, through some trial and error, determine what my "acceptable" thresholds really are that I am looking to get out each type of booking. Until now, it's a calculation that I had been doing anyways each time I looked at a potential redemption, but this was a good way to visualize the entire spectrum and to really see where those break points are.
I'm curious, what is your process for determining when an airline mileage redemption is a "good" value?