We constantly hear of ‘amazing deal alerts’ and an impulse seizes us to leap on the deal before it goes away in order to prevent the feeling of a missed opportunity. There is solid behavioral psychology behind this reason, and it is something that marketeers and sales people have known about and manipulated for many years. You’ll see it most in limited time/limited stock deals that you simply “can’t miss out on”.
Interestingly, I have seen an increasing trend in the travel blogger industry to do the same, and not necessarily for the same selfish reasons, often I think it is just down to simple ignorance and poor logical thinking on their part, however a problem arises once a person has obtained a certain amount of credibility as an expert in their field, and subsequently people base decisions on the person sponsoring the deal, rather than the deal itself. This is known as an Ad Hominem position.
This post will explore intrinsic value and also how value can be manipulated by the seller, one such example of this is a blogger who was excited to see a 2hr flight in First Class for $700, exclaiming it was a bargain when considering that a 14hr flight cost $14,000. It is a classic mistake of allowing the external forces to lead your own sense of value.
Assessing the Intrinsic Value of a Flight
Firstly we must understand the purpose of a flight. At its most basic level it is us to transport us from one point to another. Factors that should be considered as having value would be Safety, Time, and Comfort (in that order). The order is such because from an intrinsic manner if you fly on plane that is unsafe and don’t make it to your destination then nothing else matters. Furthermore, time is one of the few finite things that we humans have and as such each instance that we opt to sacrifice it by flying indirectly we are making a choice to pay with our time, it comes with a cost. Comfort also is a key factor as it can make the difference to your emotional and physical state when traveling, and depending on distance and class of flight can mean that you hit the ground fresh and running from day 1, rather than needing time to recover from the tiring experience.
No flight is free – what is the cost relative to your wealth?
Whether you are paying with points or cash, whether it is a mistake fare or a deeply discounted bargain, you will be spending money. The important issue here is relative money. If you earn $40,000 per year and see a bargain flight on Cathay Pacific First Class from New York to Hong Kong for only $5,000 instead of the regular $15,000 it may be an ‘amazing deal alert’ but it would be an increadibly poor decision from a financial perspective to purchase this ticket. In doing so, since it would be such a large percentage of your Adjusted Gross Income (AGI) you would have no choice but to make financial lifestyle sacrifices in order to facilitate it – in other words you have to consider opportunity cost.
When flying with using Frequent Flyer miles as the currency of payment many people think that they are flying for little to no cost, though again they forget the opportunity cost. For example, a flight from North America to Europe can cost 30,000 United Miles. People get these points from many sources, though a popular one is from transferring from the Chase Sapphire Preferred or Ink Bold as both have earnings multipliers on them (2x for Dining and Travel with the Sapphire, and 5x for Office Supplies with the Ink Bold). So, whilst earning points may seem cheap, also redeeming them is frequently more expensive than people realize, because they forget Intrinsic Value and lose sight of the opportunity cost.
Travel Summary created a great chart for the cost of earning ultimate rewards from certain methods of Manufactured Spending (the Bluebird and Ink Bold combination), but further to this we should consider the cost of spending them. Chase Ultimate Rewards can be redeemed for Cash at 1 cent per point as a statement credit. What that means with United and its Start Alliance Partners is the difference between flying Coach and Business is costing you a further $200, and Business and First (in 3 class flights) another $175 on top.
We have established that the intrinsic value comes down Safety, Time and Comfort, so when it comes to class of service we are clearly focused on just one element of the intrinsic value, the comfort. Now I write this post sitting in Coach from Zurich to Dubai and am perfectly comfortable. My flight arrives tonight at 9pm local time and as such I have no plans other than to locate the hotel and rest for the evening. However, just five days ago we flew from Newark to Milan overnight, arriving at 8:30am local time, and that time Coach made a difference. I couldn’t sleep on the flight and therefore arrived in Milan tired, I struggled through with lots of espresso but would have been a lot happier should I have been fully rested.
The cost of upgrade would have been an additional $75 for change fee, plus $200 in points –that would have been per person. The question then becomes is being more rested worth $550? There is no guarantee that even in Business class we would have both slept and rested sufficiently for the day, but it might have been like plugging in your phone for a quick 30 minute charge – and been enough to keep us going that much longer.
Value takes on a new face here, when we consider the trappings of time. If we were both retired then adding an extra day to the trip would have been easy, and that $550 would have been put towards a room at hotel, with a lot of change to spare- but since we are not and my wife has a limited amount of vacation days we would have to make the most of every moment. Time now has value in the short term and the long term (in the long term it is finite, so we must do our best to spend it wisely..)
Value must be ‘to us’ and not ‘from them’
Once we have evaluated the intrinsic value of something we must place it in relation to ourselves. Not all bargains are for us to capitalize upon. The greatest danger to a consumer is finding a framed reality – where the seller of the product establishes benchmarks that we buy into. By doing so the sales and marketing people trick you into thinking there is value in something where it does not exist. Another example of this will be from a Wine List at a Restaurant or Hotel. During our trip to Italy I found a particularly agreeable bottle of Wine called Nuhar. We first experienced it in Milan, by the glass sitting together curbside near the canal. We enjoyed the wine and the evening so much that I bought a bottle with me from the wine bar.
The wine by the glass cost 4.50 Euro, and by the bottle was 13.50 Euro. Somehow we found the same bottle in a train station in the countryside for 12 Euro, and finally again at our hotel for 11 Euro – per glass! The Rome Cavalieri hotel is a high end (sic)resort from the Waldorf Astoria Collection. They offered perhaps 6 Reds by the Glass and the Nuhar was placed within the range, starting at 9 Euro and ranging to 13 Euro per glass. Nuhar at 11 Euro seems like a bargain, since it is far from the most expensive drink, and I know I will enjoy it. The reality here is framed by the menu en masse, there will rarely be a menu that has items marked up by 400% that suddenly has a good product at a low price, however, if you understand the intrinsic value of all the items you can spot the real bargain should that happen.
Alcohol is a great way to judge markup, if you know the base price of the bottle of wine, or what a bottle of Kettle One Vodka would cost you in a store then you can quickly grasp the amount you are paying for the marketing premium. Food is a little harder to gauge as a benchmark unless little is done with it, such as a ½ lb plate of Prosciutto de Parma with a splash of olive oil on the side – the product has a tangible value so you can easily assess the bargain, or lack thereof.
Therefore, when we look at flights, and consider the difference between Business Class and First Class, even at its cheapest, as an award ticket, what is the $175 per ticket (in points alone) additional from Business Class gaining you? Could it be the wonderful Champagne? Let’s take an example where you can get Dom Perignon in First but not in Business. I consider Dom to be worth about $150 per bottle, I have seen it for less, and for way more. Therefore to get your value you will have to drink at least one bottle of Dom on your flight. In doing so you are losing the opportunity to drink the next level of champagne, perhaps a Moet, for free. The only person that such a decision makes sense to is one who will certainly drink the Dom and would not touch the Moet – they exist and good luck to them, but that is a very small section of people.
Of course, the bed is a little fluffier in First too, so the comfort value is there – but I think it is unfair to say you will sleep any better in First than Business, and lets remember your are still in a bumpy plane which shakes around just as much in all classes of the flight. I think Business to First is the quintessential example of marketing tricking you into a poor value decision, though I think it is also present in Coach to Business too.
As such, we can see that a company can keep increasing the cost of an item by raising its perceived value – for example you could have two flat screen TVs, with exactly the same intrinsic values and specifications such as screen size and resolution, but coat one in $50 of gold leaf and charge $500 more for it.
A good test to help with your decision is this: if you were to fly to California would you visit the French Laundry? Is good food and drink worth that much to you? If so, consider saving the $550 on the Business Class and spend it on dinner. If you wouldn’t feel comfortable spending at least that much, perhaps you have bought into the trappings of marketing, and lost sight of value, and I assure you, spending an evening at the French Laundry would be a much better use of your time than sitting in First, and dining anywhere else.