I had the chance to eat breakfast in the Delta Sky Club at New York-LaGuardia airport the other day. The lounge is bright and airy, the service was far better than what I have come to expect domestically, and the chia seed pudding tasted like a deliciously deconstructed cinnamon bun, making me feel simultaneously delighted and yet derelict to my duty to maintain a healthier diet. I thought to myself about how valuable SkyClub access would be to me if I flew out of that airport regularly. However, somewhat ironically, I had that experience while traveling home from The Travel Summit in Toronto, where I advised people to value things like that very conservatively. Despite my delight with the lounge, I stand by that advice. This post isn’t about a new concept at all, but rather it is a new attempt to convince you that Greg has always been right to value credit card perks ultra-conservatively.
An extreme example to illustrate the concept
Greg has often talked about valuing benefits based on the cost you would be willing to pay to subscribe to them. That approach always sounded right to me, but at the same time it is sometimes hard to quantify that or to even approach things in that way. But as I was preparing my presentation for the conference, this line from Greg’s post about Which premium cards are keepers? stuck out at me (the bold is his, but the green highlighter is mine for emphasis):
- Value perks based on how much you’d be willing to pre-pay if it was available as a subscription. Don’t estimate based on how much you’re likely to save.
What is the difference between how much you’re willing to pre-pay versus how much you’ll save? Does it matter? An example came to mind that helped frame my mindset on valuing perks that helped me think about it more clearly.
Imagine that I offered to book $1,000 per month in travel for you — that could be flights, hotels, rental cars….the choice would be yours up to $1,000 per month. That’s up to $12,000 in travel over the next year. Each month, you simply contact me to book your travel and I’ll book it up to $1,000 each month. You can’t roll any value over — each month starts fresh with up to $1,000 in travel, use it that month or lose it.
How much would you be willing to pay me today for me to give you $1,000 per month in “travel credit” toward bookings I make for you?
If you pay full face value, you lose $600+
If you say that you’d pay $12,000 because you ordinarily spend that much, I’d say we’ve got a deal.
Yes, I know that there are probably some readers who do spend $1,000 per month on (likely business) travel. But I’d still take that deal if you wanted to pay me $12K now to book it over the course of the year even if you intended to use the benefit in full! (Note: No, not really in the sense that I have no desire to start a travel agency, but mathematically speaking I’d take this deal).
At a base level, I’d put your $12K into a high-yield account that earns 5% APY and according to the APY calculator I just used, I’ll end up with $284 in profit even if you use the full $1,000 every single month.
Then I’ll also earn the rewards on that $12K in bookings. If we assume that I’ll use a card with a return of at least 3% back on travel, that’s another $360 in rewards that I’d earn while booking your travel if you used the full $12K.
So if you paid me full face value in advance, I’d earn $644 on you with that trade even if you used the full value. Alternatively, you could have that that $644 in cash and rewards. Paying me full face value in advance is a bad deal.
Obviously that feels different when you’re working with a much smaller figure — like a $300 annual travel credit — but the concept still holds true, albeit on a much smaller scale.
Being conservative makes more sense
I picked the structure I did ($1K per month) intentionally. I imagine that most readers probably don’t spend that much on travel each month, so you probably know that you wouldn’t use that benefit to full “face” value (and as shown above, the numbers make it quite clear that you’d come out behind if you did think it was worth paying full face value). You therefore likely wouldn’t dream of paying me $12K in advance for it.
At the same time, I bet that there is a price at which you would be a buyer. I bet that many people have at least one month out of the year where they ordinarily spend more than $1,000 on travel (and for many, I bet that there would be several months where they spend that much or at least would make a good dent in that monthly travel credit). Let’s imagine that, like the “average” family of four, you spend about $4,000 per year on vacation (I’m making that number up a bit because if you Google it, every site seems to have a different estimate, but that’s in the ballpark of the “family of four” price according to most sites). How much would you pay for my $1,000-per-month travel booking services subscription?
In that scenario (where you ordinarily spend $4K per year on travel), would it be worth paying me $4,000 now?
Obviously it wouldn’t be worth that. At a base level, see the example in the previous section to know that it isn’t worth paying face value in advance, but in addition to that math, keep in mind that you can’t be sure whether this year will be a “normal” year. If you weren’t getting a discount to pay in advance, you’d be better off just paying for your travel as it came up.
Would you pay me $3,000? Maybe you would if you already had a few bookings in mind. You might even convince yourself that you might add on a weekend away a couple of times throughout the year in months when you wouldn’t otherwise travel since you’ve got this benefit to use. In those cases, you wouldn’t really be “saving” face value on those extra trips since you wouldn’t have taken them without the benefit, but you’d still be getting something of value out of a weekend in Miami or in the mountains or whatever the case may be.
At the same time, if you don’t use the monthly $1,000 at least 4 times, you’re coming out behind financially if you paid $3,000 for it. And if you only use it 3 times, was it worth the hassle of having to call me to book something? What if you find something available at 3am and you have to wait for me to wake up to book it? You might ordinarily spend $4,000 per year on travel, but maybe you normally book it all at once instead of split over the course of four months. I don’t know if that’s enough of a deal to make me gamble on the inconvenience or the chance that I may not use it.
But there certainly is a price where I’d find the gamble worthwhile. For instance, if I could pay $1,000 now for the benefit of a monthly $1,000 travel booking allowance, I’d jump all over it. First, I currently have travel plans I need to book, so I know I could use the Month 1 credit immediately. And as someone with a mobile job (and married to someone else with the same flexibility), I know that I would very likely be able to use the credit at least a couple more times. A $1,000 price tag seems like a no-brainer in my shoes. How would I feel about $1500 or $2000? Those are the types of questions I’d have to consider.
And in reality, given my super-flexible position, I’d probably value a benefit described like this more highly than most. But my point here is that even if you’re thinking you’d only pay $1,000 a year for $1,000 a month in travel credit, there is still probably some price at which you would be a buyer — and that price shouldn’t be the full face value.
And I picked a bigger number so you could see that it also shouldn’t be terribly close to the full face value. Even if you had a lot of flexibility, it would be hard to consider pre-paying $8,000 or $9,000 to gamble on using that credit nearly every month out of the year. When working with bigger numbers, it becomes clearer that the discount needs to be substantial to make it worth putting your money out there in advance.
Apply the same concept on a smaller scale for credit card perks
That’s the type of philosophy with which you need to approach annual credit card benefits — even when they represent smaller sums, the concept isn’t different. Don’t think about how much you’ll save compared to the sticker price of what you get. In my fictional travel example, if I leveraged my location flexibility (as a remote worker) to use the credit every month, will I have “saved” $12,000 this year? Of course not — despite my location flexibility, I wouldn’t have spent $12,000 this year without that type of benefit. In my opinion, it isn’t helpful to think of benefits in sticker price form but rather in terms of how much you would have considered pre-paying.
When you’re valuing ongoing credit card perks, it is important to think of them in this way. Rather than considering how much you’ll save, considerhow much you would be willing to pay to subscribe to the same benefit. Do keep in mind the “use it or lose it” nature of most credit card benefits when running these type of evaluations.
And so, running back to my Delta SkyClub example at the beginning, how much would I have been willing to pay to enter the SkyClub? Would I pay $20 for a single-access trip? I only had about an hour, so I probably wouldn’t have paid that much to get in. However, I was hungry, so I think that I probably would have spent about $15 on a bagel and a coffee somewhere in the airport if I hadn’t gone to the club. I’d therefore have probably been willing to pay that $10 to get into the club since I would expect that price to save me a couple of bucks.
If I’d be willing to pay $10 to get in one time, how much would I be willing to pay to get in an unlimited number of times over the course of a year? That’s the type of question that I have to ask myself. Since I don’t actually live near LaGuardia airport, and since I haven’t had a reason to fly from or through it in years, I don’t think I’d be willing to pay much more than $10 if LaGuardia were my only option for using access. Of course, in reality, I can get access to any Delta SkyClub when flying Delta. Still, I’ve had a Platinum card for years and this was my first time ever using it to access a Delta SkyClub.
Therefore, I wouldn’t value the benefit beyond the $10 that I think I’d have paid for access this time (actually, I used it on both the outbound and the return, but I digress). Someone who flies out of LaGuardia often will have a dramatically different value — but even if you fly weekly, you probably don’t know that it will be Delta every time, you don’t know if you may get to the airport too late one day to use the lounge, etc. There is quite a bit of guesswork, but do make sure to guess on the conservative side on benefits like this one. If my alternative is spending $15 on a bagel and coffee elsewhere and I think I’ll use the lounge six times this year, I should be valuing the benefit at more than $90 (six times $15) — and in fact, if I assume that the $15 coffee-and-bagel is my alternative option, I should probably value the chance to subscribe to lounge access at significantly less since my bagel-and-coffee example does not need to be paid in advance and it includes no chance of breakage since it is a pay-as-I-go option. I’d only prepay for lounge access over buying my bagel and coffee if I thought I’d save substantially.
All of this post is really to support the work that Greg has long done in the post Which premium cards are keepers? and its associated spreadsheet. When you enter values for the various perks, keep this concept in mind. It’s important that you don’t overvalue perks, thereby selling yourself something at a price that doesn’t give you room for a big win.
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