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.
@FreequentFlyr @turnbullben @Drofcredit @tmount post: what is the difference between 5% ms and 2% ms? It ain’t 3% 🙂
— 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 |
|---|---|
| 1x | $0.0119 |
| 2x | $0.00595 |
| 5x | $0.00238 |
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.
First, just a math question – did you mean $8.34 profit per $1011.90 via 2% and $38.70 for 5%? I guess there are different ways to do it, which impact the exact numbers a bit.
I try to consider several factors. What do I need to do to get my money out? How long will it take? How much effort or cost is involved? What currency will my earnings be in? How likely or easy will it be to get good value out of it? Worst case and I end up redeeming for cash, is the deal still positive?
If it passes the basics, the key for me is whether or not the mechanics of a particular opportunity will impact on other, potentially more lucrative opportunities. If not, why not do both? There are not too many investments where you can earn an $8.10/$1k return in a matter of minutes. Look at CDs these days, let alone savings accounts.
On the other hand, it probably doesn’t make sense to clog up your processing capacity with sub 1% ROI when you could be filling it with close to 4%.
@Miles, I was just doing the math off of $1k vs. $1011.90. Makes sense on your factors, I still think the question is your opportunity cost, just as you say, if you’re making sub 1% ROI, when you could be doing better.
I think the Doc is off his rocker.
I do a bit of 2%, but only after all else, and only if it can be done at low cost/easy to cash out methods. I look at 2% CB only as a means to subsidize the fees on my other methods as my award redemption style almost always involves premium seats and hotels where I can leverage status to obtain significantly more bang for my points than I could simply paying cash.
As such, I never consider 2% as my baseline as I know from experience that I could never get the same seat or room with the same amount of MS if I was doing 2% (which is often 1% after fees).
So yes, when I redeem my points for an award seat/night, I look at my net out of pocket cost from my MS activities, not what I could get using an inferior/less profitable MS method and using that as my “real cost”
@Paul, I think that’s key – if you’re redeeming for awards, it has the potential to change the math vs. straight cashback.
I think you and Doctor of Credit are comparing apples and oranges.
You seem to be answering the question of “Is is worth it to MS?”. In your case, you seem to have decided that the answer is YES at the 5x level, but only a MAYBE at lower levels like 2x.
Doctor of Credit is examining the question of “IF you’ve already decided MS is worth it, should you use a rewards card or a cashback card?”. This is where it makes more sense to look at opportunity costs.
In particular, the Doc was taking a look at the Wyndham card’s 2x everywhere which gives a free hotel night after $7,500 of MS. By doing the exact same MS with a 2% card, you will be earning $150 instead of a free night. If the free night isn’t worth $150, then it makes NO sense to use the Wyndham card from a rational economics perspective. If it’s worth more than $150, then by all means use the Wyndham card, but be sure to take into account taxes/fees and the point earnings on booking it with cash as well.
The thing that interests me a little is the psychological perspective that a few people mentioned in the comments on Doc’s post. The claim is that cashback earned wouldn’t be put towards travel so they HAVE to earn points/miles in order to essentially trick themselves into benefiting from MS with travel. Even if using cashback would result in more travel! I would call this a lack of financial discipline, similar to the people who prefer giving the government a larger portion of each paycheck in order to be “rewarded” with a big tax refund. They can’t trust themselves to spend the money efficiently during the year, so they have to protect themselves from it. Unfortunately, this comes at a cost that isn’t properly taking into account most of the time.
I should do a full post about this.
@Noah – I think its pretty evident that I believe it is worth it to MS, I was trying to highlight how I estimate the cost per point, and how 2% isn’t the baseline. I think if you look at earnings on points, the math can change based on how you value the points (e.g. for redemptions).
Re your second topic of the folks that say cashback earned wouldn’t be put towards travel – that’s an interesting dynamic, Please do let me know if you write a post about it… I’d almost ask if that lack of financial discipline is indicative of perhaps someone that shouldn’t be in the game as much.
I still agree that 2% should be the baseline, but let me phrase it a different way to explain why I think so.
If a person came up to you off of the street and offered you 20,000 SPG points or $400, which would you choose?
By selecting the 20,000 points, you are giving up $400 via opportunity cost. It’s perfectly fine if you value the 20k points above $400 and will get more value than that out of redeeming them, but you can’t ignore that you’re giving up $400 along the way. This analogy maps perfectly to MS because the same time and effort is involved whether you use the SPG card or a 2% back card.
I guess I just look at it as – what can 20k SPG points get me? 25k AA points for example… I spend more time thinking of which points earning card vs. should I just be using my Fido or Arrival Plus.
sigh, I usually scoff when people post comments or write entire posts where the gist is “You’re doin’ it wrong” … but seriously, you’re doing it wrong. Your COST to MS is absolutely positively without question to be calculated against the best possible other alternative you could have used, i.e., opportunity cost. Calculating your out-of-pocket cost is all well and fine, but that is NOT the price at which you are purchasing miles. You can pick the benchmark against which to calculate your opportunity cost (e.g., 5x cash card?) and you can write about capacity limits and make the calculations as complicated as you want (e.g., cost for the CL on the best card average with cost for the CL on the second best) but opportunity cost is the only correct way to have this discussion. If you don’t agree or don’t believe this, I seriously suggest you study up on some introductory econ courses and personal finance, because it is a key concept to so much else in life. Not trying to be patronizing, but you’re just wrong.
Andrew C is absolutely correct. Opportunity cost is an essential concept, if you refuse to use it you are just tricking yourself. It doesn’t mean you have to change your MS strategy, just understand the true cash cost of the points you are earning includes the 2% cash back you are giving up.
I don’t dispute the value of Opportunity cost, I’m just trying to say that you can’t base your decision against 2%, especially with variable point values/redemption opportunities. The cost for an SPG point for example may be $0.006, however its “value” may be $0.02 Now, what if I ultimately use those points for a hotel room (we’ll keep the math easy) that would show a realized “value” of $0.10 per point. How does the opportunity cost matter at that point? I’d have to MS a 5x more on a 2% card to get the same value I’ve realized.
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I really don’t think that you and DoC are arguing about the same thing. I mean, he’s saying that whatever you do, you could’ve always substituted that effort with the same effort on a 2% card, and therefore you sort of have to remember that you could’ve gotten the cash back instead. You’re saying that you look at your earnings in points vs time and fee outlay to decide if it’s worth it.
I understand opportunity cost, but I still feel like just because you could’ve MSed for $150 cash back doesn’t mean that the equivalent effort to get you a hotel night or a flight means that hotel night cost $150. It still only cost you the fees and your time, but you could’ve chosen instead to get $150 cash back instead. No one says, well, my salary is $100,000, but I could’ve worked a minimum wage job instead, so my salary is really only $85,000. I think we are having an argument over semantics.
To me, it’s more of a personality trait, or style of travel hacking. Are you regularly checking in with yourself explicitly whether the redemptions you’re making are better than cash back? Or do you feel like you get such outsized value with your type or redemptions that you’ve settled that question once and for all? Trevor, I kind of feel like you’re saying yes to the second question. Like that your travel style just means that points are worth so much more to you than cash back, because the redemptions you’re using points for couldn’t realistically be done with cash back. But even if you’d compare to 2% cash back, you’d almost certainly still come to the same conclusion. So, what’s the point of saying, “I got this Qatar first class flight for the equivalent of $500 in MSing profit on a 2% cash back card”.
I like to just mix things up and do some cash back and some points. You don’t know what your redemptions are going to be vs their price tag on the day you redeem/buy, so no one can look into a crystal ball and know for sure whether points or cash is a better way to go. So, you have to just pick a strategy and stick with it.
I look at things like what I currently have for available points, miles, cash, and risk of shut-down from banks for perk abuse or from airlines for selling miles. If I currently have more miles and points than I can use myself within the next several years is it worth it to keep adding to my stockpile not knowing what possible devaluations will come in the future or the risk of selling miles or points and account closures? If I have been hitting particular cards hard for the last year should I back off and use other cards a bit? How do I factor in the risk of possible perk abuse shut-down? Will I come out ahead in the long run by just going as hard as I can in a short period of time assuming I will make more off a card before shut-down than I would in the long run if I go at a more moderate rate? Should I just keep hitting my highest return cards until they get closed? If that happens will they close my other cards or put me on some kind of black list so I can not get future cards? Where are the flags and tripwires? How much is too much for them?
Then there is ease of use. If I can do 2% from my couch in a very short period of time vs. 5% if I spend hours driving around which activity gives me the highest return for my time? Perhaps the 2% method will be more lucrative because of the volume I can push through. But what if the easy method I can do with a 2% card from the couch has a higher risk of negative outcome if things do not go as planned? I can’t use all cards for all activities and sometimes the risk of the activity factors into which card I will use. It’s hard to weigh and balance all these factors.
Great debate! I’m learning loads here.
http://tm.wandrhost.com/2015/05/economics-of-costs-of-manufactured-spend/
EVERYONE doing MS is DOING it at 2% lost cash back cost!
The issue is if you get more value than that
@ffi – Fair, but from reading your blog, it looks like you look at the “real” or “hard” cost vs. the opportunity cost.