Let’s face it. People are addicted to FREE stuff. And in this post, I’m going to talk briefly about what FREE really costs.
FREE vs. SUBSIDIZED
When it comes to points, it really helps to change how you think about FREE flights. Personally, I prefer to use the term subsidized travel. When I talk to people about how I earn and redeem points I try to help them understand that loyalty points are not FREE, that there’s always a cost, even if you don’t see it. Sometimes these costs are worth it, and sometimes they’re not. It’s knowing where these costs are worth it where the true value lies.
The obvious costs of points
Some of the obvious costs of collecting and spending points is simple: fees. There are fees to hold certain credit cards, fees to USE certain credit cards, and of course… as we know fees to USE the points from credit cards. Points you earn from flying on airline are also subject to fees. There are government taxes, airport improvement fees, security fees, anti-terror fees, agriculture fees, transportation levies, immigration taxes, departure taxes, fuel surcharges, normal taxes (of course), and even evil carrier surcharges. That last one, carrier surcharges, are essentially just cash you pay an airline for the privilege of using your points with that airline. They sneak that in there with all the other taxes. Maybe they think that you won’t see it with all the other fees.
These fees add up, and as loyalty programs want to be profitable they tend to pass on a lot of these fees to the customer using the points. Airlines know that most redemptions are for aspirational vacation travel, when people are more willing to part with a few bucks here and there for a FREE flight. But you’re still saving 70% the cost of a $500 flight if you spend $150 in taxes, so much people just pay the fees and move on. However, there is a slightly more subtle form of cost, and that’s opportunity cost. You have to evaluate if you’re REALLY getting value out of your points. If you’d earn 1% cash back on a simple credit card, does it make sense to effectively get 1% of value out of points that are tied to a specific brand? I wrote an article about the TRUE cost of earning and redeeeming points and what opportunity really means within the scope of loyalty programs.
So, what’s the point? Don’t be tempted to think that redeeming points means FREE flights. Come up with a value for each points and try not to redeem for less than that value… despite how tempted you might get to do so.
There are always costs, and if you don’t do the calculations, you could end padding the profits of a loyalty company or subsidizing others who were more discerning in how they used their points. On the other hand, sometimes a redemption may not be the best value but it offers convenience or flexibility and keeps the family happy. I wrote a little about this when booking a flight to Hawaii. You may enjoy reading that.
Happy Points Redeeming!