Customer loyalty programs can take many forms, but the most popular involve rewarding certain behaviors by issuing points or miles. The first formal program launched in 1981, and since then, the number of points and miles earned by consumers is mind-boggling.
Yet despite earning the right to buy goods and services or get cash back, many points and miles go unredeemed. Although it’s difficult to track down a precise number, the most recent reliable information indicates between 10 trillion and 14 trillion miles and points have been earned but are currently unredeemed. To put this into perspective, just 1.16 trillion worth of paper dollars are in circulation at this time.
While we call them "points and miles," they're basically a currency that's issued by private companies, with businesses in the travel, restaurant and financial sectors tops when it comes to awarding the most points and miles. These points and miles have value and can be exchanged for goods, services or another currency (such as dollars). As with any currency, however, when the supply becomes too great, the risk of devaluation exists.
A leading airline recently revamped its redemption policies, eliminating the ability to transfer or bequeath miles to your heirs. Other airlines have increased the number of miles needed to redeem different benefits. Still others have severely restricted the lowest priced rewards, making it difficult to fly on the “cheapest” mileage award seats.
These are all symptoms of the same problem: an overvalued currency. Miles and points are a liability for the issuing company. At some point, they'll have to make good on their promise to exchange some of that currency. For some companies, the amount owed in future benefits reaches into the billions of dollars. Since they control the value of the currency, they can adjust the value to minimize the dollar cost of future redemptions. Typically when this happens, the value adjusting will start gradually and then spin out of control.
The Zimbabwean dollar (ZWD) is an extreme example of what can happen when a currency's vaue is lowered. Zimbabwe experienced inflation rates of between 7 and 20 percent from 1980 through 1997. Then inflation crept into the triple digits through 2005. As the country’s treasury began printing massive sums of ZWDs, hyperinflation took over. By 2008, the country was experiencing annual inflation of 6,500,000 sexdecillion percent (6.5 x 10108). Although miles and points aren’t likely to go through anything quite this extreme, the fundamental concept is the same.
Spend Or Save?
The best advice for business owners holding large point and mile balances is the same given to people living in a country with high inflation rates: Spend your money now before it loses value. Or invest it. But because you can’t invest points and miles in the hopes of earning a higher return, your only choice is to spend them or save them in hopes they'll retain their value. The sooner you spend them, though, the more likely it is you’ll get the most for your money.
Of course, not all rewards are created equally, and the price you pay in points or miles varies greatly. Before spending any of your miles, calculate the implied exchange rate that's being offered to see if you're getting the most for your money. If a plane ticket costs $500 or 50,000 miles, each mile is being valued at $0.01 (500/50,000 = 0.01). If the same loyalty program offers a digital watch that you can buy online for $190 or for the same 50,000 miles, then each mile is being valued at about $0.0038 (190 / 50,000 = 0.0038) or a fraction of a penny. In this case, it’s a better deal for you to buy the plane ticket.
Most programs also provide more generous rewards for higher redemptions. The value assigned per mile goes up when you redeem larger balances. So the value per mile or point (VPMP) for a 250,000-point award redemption is much higher than for a 2,500-point redemption. If you're close to reaching a large mile or point balance milestone, it's best to accumulate to that point and then spend your points or miles.
There are also programs that provide points and miles as a bonus for signing up and completing certain activities within a specific time frame. This can generate anywhere from 20,000 to 50,000 extra points or miles, which can go a long way toward helping you redeem better awards.
If all this sounds confusing, don’t let it be. There are a number of online services, like UsingMiles, that help you keep track of your points and miles balances across companies and find the optimal way to spend them.
One last thing: You have to think about taxes when it comes to your points and miles. Those you earned as part of normal use aren’t considered taxable. But if you receive them as a bonus for opening an account, for example, then those bonus points and miles are considered taxable income. This generally wasn’t an issue years ago, but now that the IRS requires a 1099 notifying them of payments above $600, you may find that a company that's issued you a large bonus award may value it at more than $600 and will send the IRS a notification. If you receive one, don’t be surprised. Just pay Uncle Sam his share and spend the rest.
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