Saturday, January 19, 2013

Let Me Show You Why Starwood's Cash+Points Change Might Not Be So Bad

Starwood just announced an update to both the cash and points parts of their Cash+Points redemption option (a favorite among pretty much all fans of the program) - and the reaction from the points community was swift! See here, here, here, here, and here for some of the immediate reactions. Oh, and don't forget the meltdown on FlyerTalk here.

This is what everyone is reacting to - the new Cash+Points award chart:

New Starwood Cash and Points chart
(click to expand)

Compare and contrast to the old chart:

Current Starwood Cash and Points chart
(click to expand)

It's a 25% increase across the board in terms of the points required and a 17-25% increase in terms of the cash required for standard rooms (note: the recently-introduced Category 7 option didn't change at all). There's no question, that's a devaluation, and it sucks. However, the official announcement also mentions "the intention of expanded availability" for standard rooms. I'm giving Starwood the benefit of the doubt and am going to assume that it will increase to some degree. The question is, will that increased availability be enough to offset the fact that each redemption is now somewhat less attractive?

The answer, it turns out, depends on how you value your Starpoints. Here's why:

I'll take category 4 as an example - under the old / current cash and points chart, the savings offered by cash and points vs. a standard award redemption is 6,000 points minus a $60 "co-pay". Under the new chart, the savings offered by cash and points vs. a standard award redemption is 5,000 points minus a $75 "co-pay". Let's call the value of a single Starpoint "X". The ratio of the savings is therefore:
(6000X - $60) / (5000X - $75)
This ratio varies a lot depending on X. As X gets really big, the ratio approaches 6/5 or 1.2 - in other words, under the old chart you saved 20% more vs. a standard redemption than under the new chart. In order to make up for this devaluation, the availability of Cash+Points would need to be at least 20% better. That's not bad at all if you ask me. If it was available 10% of the time, it'd now need to be available 12% of the time. If it was 20%, it'd now need to be 24%. That said, this is taking things to the extreme limit - "limit as X approaches infinity" if you will.

If we look at a more reasonable range of Starpoint valuations, you can start to see that the availability needs to go up by a pretty healthy amount to make up for the changes in the chart. If you value your Starpoints at $0.025 (as I do), then the availability of category 4 cash+points redemptions needs to go up by about 80% (10% to 18% or 20% to 36%). I could still see that happening, but it's by no means a sure thing.

Note that if you only value your Starpoints at $0.015, then the new Cash+Points chart doesn't save you anything vs. a standard award redemption.

You could do a similar calculation for the other categories that will be changing to see how much more availability you would need to see in order to "break even" vs. the current cash+points chart. Or you could just take a look at this table which already has that taken care of (note that I removed those cases beyond the point where cash+points stopped providing a saving vs. a standard award, as well as those extreme cases right next to them):

Starwood Cash and Points calculations
The chart represents the magnitude of devaluation / the required improvement in availability needed to equal the existing cash+points chart as a function of Starpoint valuation. The numbers represent how many times better availability will need to be to "break even" (i.e. a value of 2.00 means that availability will need to be twice as good as it used to be)

If you're like me and value your Starpoints in the +/-$0.025 range, then you basically need availability to double in order to break even (depending on what category of hotels you typically redeem at). I'd estimate that I've had about 10-15% availability when looking for hotel awards, so if that will now be more than 20-30%, then I'm a happy camper. I know some value their Starpoints much higher ($0.035 or so), in which case, you don't need as much of an improvement in availability in order for things to work out in your favor.

How about you? Where do you fall on the chart, and do you expect that Starwood will increase availability enough to make up for your current cash+points availability?

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