When writing about the upcoming changes to Starood’s cash and points awards, I said that it’s good that cash and points will become available for premium rooms and suites, and also good to the extent cash and points awards will be more available than before.
It’s bad to the extent that you could have gotten a standard room cash and points before at a lower price, and the rooms that had been available before will now cost 21% – 25% more.
But I also said that cash and points remains a good deal relative to standard award nights. I didn’t go indepth into the analysis of why that’s true.
Reader RQ commented,
I think it’s awful Gary.
In most cases it now costs more than 2 cents per point to “buy” the difference in starpoints between a C&P award and a standard award (figuring an approx. 15% tax). Which means there are very few cases where it would be better to use C&P over a standard award.
I don’t think that’s quite right. Although I understand the frustration.
Now, RQ is correct in how to think about whether cash and points are ‘worth it’. In paying cash, you are basically buying the difference in points between the cash and points number of points required and the number of points required on a standard night.
In my world I believe every question can be settled with a spreadsheet. So I plugged in the number of points that cash and points award saves compared to a standard award night in the same category.
For this purpose I am assuming it’s not high season (where the savings would be much bigger in cash and points’ favor). And I assume we’re not talking about a weekend night where category 1 and 2 hotels are 1000 points a night cheaper for a standard room award.
Here’s the price you’re “buying back” your Starpoints when redeeming cash and points.
Now RQ makes one additional point that shouldn’t be overlooked. You will generally pay hotel taxes on the cash portion of a cash and points award. That means a cash and points stay is a little bit more expensive than a regular award stay. So let’s do the analysis assuming taxes on the cash portion of cash and points. What does this do to the price you’re effectively buying back Starpoints at?
Category 3 and 4 hotels are where cash and points awards are ‘most worth it’. That was true before and remains true.
If you aren’t willing to buy Starpoints at 2 cents apiece then you aren’t getting the value you’re looking for out of other categories. But remember that these are effectively purchases at the margin because they’re necessarily coming at the point of redemption. You might not want to be buying all of your points at 2 cents or more apiece, but would you buy half your points at that price?
That’s the question to answer. I value Starpoints at over 2 cents each, so I still consider this a value. And when redeeming for a category 4 hotel, I only need Starpoints to be worth more than 1.7 cents.
But the spread between what you’re buying points for using a cash and points award, and what those points are worth, has narrowed.
Where These Changes Inevitable?
I noted in my original post on the subject that Starwood had not ever raised the price of cash and points awards before.
But I then also made clear that this is not an excuse to do so now. (“But that’s not just an argument that it’s reasonable to see award chart inflation. I don’t think it really is.”) I’m not sure I gave enough of an explanation of why, though.
Room rates may go up, but that’s what Starwood’s hotel categories are for. When a hotel’s room rates rise, then each year Starwood moves hotels around the different categories. It may go from category 3 to category 4, in which case the cash and points price for that hotel goes up. Eventually there wind up fewer and fewer category 1 and 2 hotels perhaps. But there’s no reason that the price of a category 3 redemption needs to rise. And there’s no reason a category 3 cash and points award needs to rise, either.
Lucky covered the changes and disagrees with that analysis,
I really don’t think we can blame Starwood, given for how long they kept rates the same.
When pressed, he expands in the comments:
While points might not be easier to earn, there’s no doubt that there are more and more points in circulation each year, which could reasonably cause a devaluation.
But I think this gets the economics of the program wrong.
‘More points in circulation’ means devaluation for an airline program where those increased points are chasing a limited set of (capacity controlled) seats the airline expects not to sell. Then either the price of those seats has to go up, or you have unsatisfied members who just can’t find seats.
But the economic model of most hotel programs including Starwood’s is different. They don’t have “more points chasing fewer rooms.”
Instead they sell points (to their hotels, to American Express, to their other partners) and manage redemption categories so that their redemption costs are lower than associated revenue.
Where they run into trouble is when more and more rooms are being redeemed at sold out hotels, and they have to reimburse an increasing percentage of redemption nights at each hotel’s average daily room rate instead of at their discounted reimbursement rate.
That has never been a component of cash and points awards in the past at all.
So the only ‘justification’ (other than “because we can”) for increasing cash and points award prices is to change the economics of the award and get more availability. Whether that’s good or bad for members is open for debate.
But it isn’t required by the economics of the program, as a result of time, as a result of rising room rates, or because there are ‘more points in circulation’.