Monday night, Doctor of Credit lamented his frustration with how manufactured spending (MS) costs are articulated. His argument, to put it succinctly, is that your costs should be estimated by what you could have earned if you had MSed on a 2% card. That, vs. the thought of assessing your MS costs by the $5.95 activation charge, and any liquidation charges.
Would you Manufacture Spend for 2%?
I’ve talked a fair amount about grabbing the Brass Ring, and how miles and points can often offer outsized rewards. But, let me set that aside for a moment. If you were just MSing for the cash benefit. Would you MS for 2%? Lets say, there is that $5.95 fee (we’ll double it to $11.90 per thousand), you’d essentially be looking at earning just $8.10 per thousand for your time.
— Matt from Saverocity (@Saverocity) May 11, 2015
Let’s change the math a little, since, I think we all agree in the pursuit of 5x, that 5x/5% (which are not the always same thing by the way), is worthwhile. Now, your rate per thousand jumps to $38.10 per thousand for your time. That starts making a big difference. Just as Matt says, the difference between 2% and 5% is the significant; to do the math, it’s — Pretty cool, right? It’s why those few 5x or 5% opportunities out there are chased and leveraged strongly.
Calculating Manufactured Spending Costs – Cost ≠ Value
So now, think about what kind of value you can get from you points, based on redemptions. No, I’m not going down the path of saying you can MS a point at a cost of $0.006, then redeem it for $0.10 and that’s the value of your points. That sounds nice, but the fact is, it’s unreasonable, because you would never pay $10,000 for a First Class ticket if you were MSing on a 2% card. If that were the case, then why hasn’t someone booked the Etihad Residence via MS yet, even for those that leveraged 5% or greater cards? They haven’t (at least that I know of), but, a bunch of folks, (including myself) have flown the Etihad Apartments, via American Airlines miles.
So, how do I calculate the cost of MSing? I calculate it based on the fees of purchasing and liquidating. In the case of the above example, I would estimate my cost per mile based on the following table:
|Multiplier||Cost per Point|
I calculate manufacturing costs at how much I pay per point, rather than the opportunity cost as compared to a 2% card for a few reasons:
- The true outlay cost is most always my concern, especially when scaling.
- The ultimate value, as illustrated above, can be much more than earning from a 2% card. So, I’d argue that “value” and “cost” are not equal.
- To that point, I don’t accrue points for the purposes of cash back, rather, I do it for travel awards (reasonably, I’d say 98% of my redemptions are mileage or hotel awards)
- Of course, I should calculate the cost of my time into the cost per point, a la Milenomics however I’m not quite at that level.
Now, I don’t necessarily value the point at that cost, or the redemption value, probably somewhere in between, I know that FrequentMiler has his fair trading prices, and some of the other big bloggers share their monthly valuations. One thing is for sure, the values do waiver , perhaps that’s a topic for another time.