Why You Should Change Your Mentality About Frequent Flyer Miles, Points, and Credit Card Rewards

Everyone knows frequent flyer miles and credit card rewards are valuable, but there are opposing schools of thought when it comes to how you cash in those hard-earned points:

• The Impulsives: People who use miles and points as a short-term solution, converting them into cash to reduce credit card bills or using points to book domestic plane tickets.

• The Dreamers: Long-term planners who view miles and points as more of an aspirational opportunity, saving them up to book the trip of a lifetime.

Today, we’re going to look at not only the facts but also the psychology about saving versus spending and give you a peek behind the scenes into how airlines play the miles game. We predict that you're going to walk away with a whole new mentality when it comes to how you approach your miles and points.

Think of Miles Like Money

Consider these two scenarios:

1. A roundtrip economy class ticket from New York City to Los Angeles will cost you about $250 if you book it in advance. That same trip using miles might set you back 20,000 miles. That's less than 1% cash back.
2. A roundtrip business class ticket from the U.S. to Japan will cost $10,000. With some creative hacking, you can book that business class seat for 100,000 miles — which is just five times as much as the economy class ticket that took 20,000 miles. But the investment represents a whopping 10% cash back, which is a whole lot more than five times the value.

So here's the question: Would you buy Tesla stock and sell it for 1% cash back or would you hold onto it until you can make 10% on your investment? Your answer should inform how you approach miles, as well.

"Our advice: Miles are like stocks. They will eventually pay dividends."

Understand the Concept of Pricing

Another important part of award booking is understanding that airlines offer award seats for points in two different ways — fixed and variable pricing — and one of them is much more beneficial than the other.

Here's how it works:

• Variable Pricing: Most airlines will let you book any flights for points using a system called variable pricing. Each seat is priced as if it had been sold for money, and the cash price of the seat is translated to a price in points at, say, five cents a point. Buying seats with variable pricing means you’ll be paying a large amount of points to get a seat, but there will always be seats available. Seats are therefore easy to find and the booking websites are generally better and faster when it comes to what's offered using the variable pricing system.
• Fixed Pricing: Here, the airlines list the seats that they think won’t be sold and offer those seats for points at a huge discount. For example, when browsing award flights on United, the ones you’re looking for are in the “Saver” category. The problem is that the “Saver” category isn’t listed separately, it’s mixed together with all other seats and you have to actively look for them.

This chart below illustrates the concept using a booking on United Airlines. Some things to note:

• The green box shows the fixed price seats, while the red box shows variable pricing.
• As you can see, United offers Saver seats to anyone that has points in Star Alliance. For example, if you have United Mileage Plus points, you can find the more beneficial fixed price points seats in Lufthansa and United on the United website.

Other airlines only offer variable pricing on their own flights, and fixed pricing on flights with partner airlines. For example:

• If you have Delta SkyMiles, you’ll only be able to book the less beneficial variable priced seats on Delta flights, but you will be able to book the better fixed price seats on partner airlines like Air France/KLM.
• The opposite is true if you have KLM Flying Blue points. You’ll only be offered variable pricing on KLM flights, but will have fixed pricing on Delta flights.

Fixed pricing also means that flights in business class are typically sold for less than twice the price of an economy class seat when you use points. But since a paid seat in business class is often five to 10 times more expensive than economy class, simple math tells you this: 

"It’s smarter to save points for a trip in business class than use them for economy class flights."

But here's the question: Why have the airlines chosen to do business this way? There's unsold inventory, so why wouldn't airlines let go of those unsold seats for small amounts of points given that they wouldn’t have been sold anyway?

Airlines don’t want to publish extremely discounted prices — it’s not good for business. Instead, it's better to have a points system as "camouflage." This is why the more beneficial fixed pricing is often only available on partner airlines. They don't want to discount their own brand to their own members.

There’s an intricate system behind everything, and you need to understand the points system to know that the airlines are in fact dumping unsold inventory. But since most people don’t understand how points works, the airlines are safe.

So clearly, when you realize that you’re looking for award seats with fixed, not variable, pricing, you've got a better understanding of the points system and are well on your way to hacking the system.

Get to Know the Psychology Behind Points

Another reason people spend their miles quickly or hoard them comes down to pure psychology.

“We, as humans have an innate desire to reach goals and objectives and cards and points allow us to do this,” says Frank Burns, professor of hospitality management at the University of New Haven. “We want to work toward goals that we find are a stretch, but are achievable. It gives us a sense of self worth.”

Ten years ago, the editors at Psychology Today did a study to see why and how people get hooked on loyalty programs. This is how it was organized:

1. People were placed in a lab, which was modeled after a restaurant.
2. The diners were told to order a number of meals from the "restaurant."
3. Like an airline loyalty program, the restaurant either paid 10 points per dollar or one point per dollar.
4. If the diners were given 10 points per dollar, a reward required 1000 points.
5. If they were given one point per dollar, then a reward required 100 points.

The study found that when the diners had just started to use the program, the number of points that they were awarded did not matter. However, when they were 80% of the way toward their goal, they became much more pleased with the loyalty program, especially when they were given a large number of points than when they were given a small number of points.

The takeaway here, according to the Psychology Today report: If you are going to use a loyalty program, focus on how much more you have to spend to get a reward and not on the total number of points that you have accumulated so far.

And Professor Burns agrees. As you get closer to your goal — like a business class ticket — it will feel much more rewarding than if you spend your smaller points earnings.

Game It

Another 2015 report looked at why loyalty programs work and found that the concept of gamification helps drive how we interact with these programs.

As humans, we are naturally predisposed to gaming, which works by encouraging people to engage in desired behaviors and showing a path to mastery.

“Accept the game, play the game, win the game.”

For example, with the airlines, you usually need to earn 25,000 to buy your first economy class ticket with points. As travelers get closer to that goal, they start to accelerate their behavior to get to that threshold. They get hooked.

Professor Burns concurs: “For some people, the long range planning is tonight — they’re looking for instant gratification. For others, they need to map it out and graph it and see how many points they need to get those tickets to go to Bermuda. They’ll spend thousands of dollars to get it right and set those goals to get that next level.”

In the end, according to Burns, travelers get hooked on the payoff for being loyal, for playing the game, and for staying in the game. And when they achieve that bigger reward, “the sense of satisfaction is so much greater.”

So, here's what you want to do: Play the game. Find your endgame and focus on it. Ignore the free flight you could get from Detroit to Phoenix, and reach for the stars — or in this case, how about a first class ticket to the Maldives? There's no sweeter reward than that.

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