Should Opportunity Cost be Considered in Travel Hacking – The Four Great Debates, Part 1

I am surprised no one has mentioned the opportunity cost of labor. That is the concept we studied in Economics and has been frequently questioned on miles & point blogs like this one.
Take, for example, a reselling deal that may earn points and cash. The blogger spells out the deal/scheme and invariably gets asked at what rate their labor is valued. Many folks won’t spend time or effort without a minimum payout. The blogger typically can relate a figure such as $100 an hour, though very few people in this World get that kind of pay for their spare time!
Each of us taking the time to read and/or respond today is experiencing an opportunity cost.

Points have no value the experience has value. The only opportunity cost is the opportunity to have the experience or not. Do I want to spend the points or the money on that specific experience? That is the question that matters to me. The currency I use for that experience is not important to me. The energy spent on figuring out all these extraneous items to the experience is just noise in my book and I have no energy for them. They add no value to me to figure out if that is the travel experience that is right for me. If getting a steak at Applebees is right for you great if getting a steak at Flemmings is more your style enjoy it. There is a difference on so many levels even if people want to just compare the cost.

Wow, this article and comments were fun to read, and Jay’s comment got me thinking about the value of fun itself. I totally agree that calculating the opportunity cost of every transaction and redemption is only worth it for those of us who enjoy that part of the game. The calculations and obsessive attention to detail satisfy my inner Sheldon Cooper. For people who don’t get their jollies by creating unnecessary math problems, I always recommend keeping it simple: earn three big bonuses per year and never accept less than 1.25 cents per point on a redemption. Following those two rules will get most people a huge percentage of available rewards with a tiny fraction of the thought.

For those of us who prefer redeeming for first and business class seats we would never pay cash for, I’ve started to realize there’s an opportunity cost to that as well. Specifically, if I’ll never settle for less than 2 cents/point, it means a lot of times I’m going to pay cash for flights I could have had for free, even while I’m sitting on a mountain of over 1.6 million points and miles. If I can’t spend them as quickly as I can earn them, I’m starting to feel like a sucker for never letting myself save $325 by redeeming 25,000 miles. I wonder if anyone else has thoughts on the opportunity cost of always refusing to accept a mediocre redemption.

As Mark stated he hoped this would be an open sensible discussion as we all have our own points of view. So far the article and reader comments have been excellent and provide lots of “food for thought”.

I honestly had not really thought about “opportunity cost” before for my redemption’s but I’ve always looked at the value I’m getting for the points when making a decision as to whether to use points or pay cash and earn additional points. In my view the points I earn from actual travel/spend and signup bonus is free money but again that’s my POV.

I travel on business several times a year and that gives me the opportunity to earn in my primary programs Delta and Hilton. I have even used my Delta points in the past to pay for an upgrade to First on some of my domestic trips as I’m interested in my personal comfort.

Recently my wife and I took at long weekend trip and I used some points and some cash. First of all my Delta Reserve card gives me an annual companion pass which allows booking in First so I paid for my ticket and earned miles and MQM (to help reach Platinum again) and look at that as a huge offset to the annual $450 fee for the card. I used Hilton points to book a great property and then opted for the upgrades they offered at reduced rates. So I earned several bonus points for the cash spend but also used some of my Hilton points at around a 0.5 cent rate.

We have an upcoming trip for Thanksgiving and again I’ve used some dollars and some points. The decision was made based on redemption rate and whether the point earn is worth the cash. I have some hotels I’m paying cash for since the rate was so low vs. the points and another where I’ve booked a nice suite using points where the redemption rate is only 0.4cents but we get a great room for no cash outlay. We chose to pay cash for our flights since booking well in advance the rates were so low and we paid for premium seats in economy (short flights 3 hr).

For me the points/miles allow us to redeem for some great personal travel and usually to fly First class or Premium economy and stay in upscale properties.

Keep up the thoughtful comments as it always help all of us to learn about other options.

Interesting debate and I look forward to the rest of the series. I also have used miles/points to enhance trips, but sometimes I take a slightly different tact with my miles and points. For example I wanted to meet my sister and niece at the end of her school trip in Dublin and go to Great Britain (and pay for it) for 5 days with them as a graduation gift for the niece. All the hotels and my flights and their flights home were on miles and points and taxes were paid with my Arrival. The trip had to be at a specific time and the place was my niece’s dream trip. I really did not look at the value of those miles and points. I looked at what I had that could get me a room for three for five nights and the flights I needed. I also flew business to meet them but that was a splurge for me. Sometimes travel does not happen at all without miles and points and if you want to go on the trip value is not your most important issue. The trip this summer would not have happened if I had had to pay with cash. Miles and points made it happen and seeing my niece enjoy her dream trip was worth every miles and point spent. Thinking about New Zealand for her graduation from college present in 4 years.

Thanks for the topic, Mark, and thank you to all the other readers for your comments. I’m brand new to the points/miles world (still in the collection phase), and I greatly appreciate the various perspectives everyone brings to the table with regards to collection/redemption. I’m definitely taking it all in, and plan to apply it all to get the best value for my points/miles in the future (whatever the definition of “value” happens to be at that time…) I look forward to the rest of the series!

It’s a bit difficult here to understand exactly what point you’re making: that there aren’t opportunity costs, or that they are overstated by some people. I frame the debate a bit differently:

When we talk about the value we receive from travel rewards, we should talk about net, not gross value. Net being that which we receive above our opportunity cost.

For example, if we spend $10K on a CFU, transfer to Hyatt, and redeem for a 15K free night with a cash cost of $300, our net value above putting the same spend on a 2% CB card is $100. We could have earned $200 in cash instead. It’s not accurate to exclude opportunity costs when valuing our points.

However, I am sympathetic to the argument that opportunity costs can be overstated. For people who are earning points simply through churning sign-up bonuses and maximizing regular spend, opportunity costs are very minimal.

But for those of us doing several $100K+ of MS per month, there are cutoff points at which using a simple 2% CB as a benchmark is not appropriate. Most of the 2% cards are issued by banks that are not very MS friendly (Citi, Elan (Fidelity), Barclays (if you include Arrival+ even though it’s not really cash etc.). At some point, accounts will be shut down, and the next best alternative results in a lower opportunity cost.

My only reason to collect points is to enhance my travel experience. There is no way I would pay the cash required to fly first or biz class, and/or stay in upgraded rooms. Therefore, if I calculated the opportunity cost, or took cash instead, I would not derive the same pleasurable experience.

Opportunity cost for me is what room/flight upgrade would I be missing out on by accepting a certain redemption? If I spend, for example, 95,000 Hilton Honors points on a Standard Room award at the Waldorf-Astoria, could I have instead parlayed those points into a much more valuable Signature Suite by taking advantage of a promo and/or cobbling those points with a promo/ upgrade/free night package?

In other words, I am most concerned with the overall value I am receiving from my redemption rather than its singular dollar cost, though the final result would also typically be considered a “deal” by its very nature. I evaluate the cost but mostly if the redemption serves my wants/needs. I recently earned a suite at the Dolce Silverado Resort by mattress running 2 stays at a $35/nt Super 8 in BFE. I spent $80 ttl at a flea bag property for the opportunity at a $400, 700 sq ft self-standing lovely cottage in wine country. I am personally not very interested in this example with the very little money a cash back card would award me – I iam mstead seeking a better room and experience.

It absolutely is reported on a company’s income statement. Cash back is considered a reduction in cost. So if a company charges $1,000 for widgets on a credit card and receives 2% cash back, the expense is $980, thereby reducing expenses. If the company decided to forgo the 2% cash back, expenses are increased. The income statement doesn’t have a line item that says “opportunity cost” because its already baked in.

I’m also a contrarian, and I believe you underestimate how expensive opportunity cost can be. Define it as what remains after you subtract the value of all the options you did not take from the value of the option you did take, and the opportunity cost of Hitler’s decision to invade the Soviet Union in 1941 was losing World War II. Of course, it didn’t look that way at the time. The conundrum of opportunity cost is that it nearly never is as clear in foresight as it is in hindsight, and that’s mainly because we never have perfect information. To draw an analogy specifically to this game we play, how many people do you suppose lost out on the 100K CSR because what turned out to be 5/24 was a credit card that gave them 20% off on a nice department store Christmas sweater nine months before CSR was introduced? In short, opportunity cost exists, and since we can almost never judge it accurately when a decision is made, we have use our best judgement and learn to live with the results. I mean, you did get 20% off on a nice sweater, right?

using chase UR to convert to Hyatt for a night in Park Hyatt tokyo vs a capsule hotel for 25 USD. i sleep well in both, and i probably like the accompany in a capsule hotel. but people obtain the price of chase points via the cash cost of Park Hyatt tokyo/points per night to obtain the cost.

I generally look at how much a booking will cost me vs. what I would buy if I didn’t have points. This leads me to almost always trying to get a cash value out of points rather than redeeming them. I am vehemently opposed to valuations which justify flying first class vs. the coach class I would ordinarily purchase. I find with this perspective that the 3-7 cents per point valuations are almost always exaggerated. Example one of the best redemptions using Hyatt points is a category 1 Hyatt place hotel. I recently booked a hyatt place with a Hyatt.com advertised rate of $153…. seems like > 3 cents per point and a no brainer reservation. But I could book a Choice hotel on a travel site for $62 a night with cash. The Choice hotel is comparably clean and gives a comparable free breakfast. A bit less prestige perhaps, but in general pretty equivalent. Moreover, I found that the Hyatt room with taxes included could be booked for $115 nightly rate through almost any travel portal (advertised as low as $95 per night without taxes). I looked at booking the Hotel through the UR portal and found that a competitive rate was not available for either hotel even with the 50% bonus. I didn’t have any Chase points so I gave up there. Hyatt points won out, but just barely. I’d rather have 1.5 cents per UR than any of these options. Fact is, almost no one will pay 1.5 cents per UR. If I’m wrong I’d love to get some offers.

I disagree with your take on Fortune 500 conpanies not reporting opportunity cost. It is captured in the ROI – return on investment. A company should return at an acceptable rate on any investment they make. It accounts for what they could have earned using their cash somewhere else, like bank interest or bonds. You should always think about opportunity cost.

Great thought starting article!

I ignore most opportunity cost just because that’s not why I get into points and miles. If I wasn’t going after travel redemptions, I wouldn’t sign up for cards or increase my credit card spend through MS or reselling gift cards. It wouldn’t be fun or worth my time if I was going for cash, so I never would realize the 2% cash back as another alternative. When replacing every day spend, I could see the argument with opportunity cost but it’s a small portion of my credit card spending and negligible to me

I don’t think using $.01 per point is fair. Most people with UR will have the Sapphire or Reserve and will be able to get $.0125 or $.015 through the travel portal. But even that’s low-balling. You said it yourself “a sign up bonus worth $7-800”. How do we arrive at that valuation? We multiply the number of points by their subjective value. For UR, that might be $.018, which is the value you might be able to reasonably average with redemptions. So your 25,000 point room is now $450. That’s how I calculate my opportunity costs.
Unfortunately as of late, the more difficult it gets to get that 1.8 cents worth of value (lack of saver awards for the desired travel period), the lower the value of UR and the more enticing to save the cash. It’s a balancing act in the end, not an equation.
Also at play is how easy it is to replace those points and your current balance of them.

Excellent article. I have been so happy you joined the blog crew. Thanks.

There is another kind of “opportunity cost” to consider: When you use points or miles, you are often foregoing the opportunity to accrue more points or miles by paying the fare with your credit card. I usually factor this into my decision-making.

Mark, I respect your thinking but your reference to how companies don’t report or think about their opportunity cost is absolutely false. Anyone with basic business or finance education will tell you that opportunity costs are business leaders think all the time. Give you on simple example, if company’s cost of capital is 12%, it will not invest in any project that has 8% return…because their investors opportunity cost is 12%. Anyway, you get the idea.

I take a simplistic approach to this. 1) Points are not free, you have to spend money to get them, and invest time into the game. Time is money. Banks pay for points they hold for you. They cost money.
2) In the decision process of evaluating an award cost, using the assumption that points start off at $.01 in value, I simply divide the cost of the award by the number of points needed. If the remaining number is less than $.03, I think hard about the award. If it is over $.03, I am happy. If the number is $.05 or more, I am very, very happy.