Today I am launching a new series called Travel Hacking Dictionary where I will provide clarity around some of the common phrases and acronyms that are thrown around in the community so you can get better acquainted with the what everyone is talking about.
Today we are going to talk about CPM or Cents Per Mile.
What is CPM
CPM is a yardstick by which we measure the value of a deal. Once you know your CPM, you can answer a multitude of questions including:
- Should I pay for my flight or use points?
- Should I pay for points when they are on sale from an airline or hotel?
- What value did I get out of my redemption?
CPM is quite a simple mathematical equation.
CPM = (Cost / Miles) x 100
Ready for some math? Okay, then let’s look at it from a couple different perspectives.
When we earn miles, there are some miles that are free and some that cost money. An example of free miles are credit card sign ups that have a sign up bonus AND no annual fee for the first year, otherwise known as First Year Free (FYF).
For example, the American Express Gold Card currently offers 25,000 Membership Reward Points and the First Year Free so the calculation for the first year would be:
CPM = (Cost / Miles) x 100
CPM = $0 / 25,000
CPM = 0.00
If we look at a card that does not have an annual fee waiver such as the Capital One Aspire Card, we see that the current offering is for 40,000 Capital One Aspire Points with an Annual Fee of $150, so the calculation here would be:
CPM= (Cost / Miles) x 100
CPM = ($150 / 40,000) x 100
CPM = 0.375
Now that we know the cost to acquire our points, let’s take a look to see how much value we are getting out of our points.
To make things simple, I will take the example from my most recent redemption as an example. I am going to be going to Roatan, Honduras in January and I used points to book my flights.
The retail cost of the flight for 2 people was $1,663.42.
The cost for our flight using points was $357.02 and 80,000 Aeroplan Points.
In order to find out the value of each Aeroplan point we used, you first need to find the value of the flight less taxes. We take the taxes off the calculation because we have to pay for them out of pocket so we get no value from the points.
Redeemable Value = Retail Cost of Flight – Taxes
Redeemable Value = $1,663.42 – $357.02
Redeemable Value = $1,306.40
Now that we know the Redeemable Value and we know how many points we cashed in (80,000), we can now calculate the CPM.
CPM = (Redeemable Value / Points Redeemed) x 100
CPM = ($1,306.40 / 80,000) x 100
CPM = 1.633
Okay, I Can Calculate CPM … Now What?
Well now that you understand how much it cost you to earn your points, you can use that information to determine if your redemption is a good use of miles.
In my example above, I actually used my American Express Membership Rewards and transferred them over to Aeroplan and I know that I historically earn my Membership Rewards Points at less than 1¢/mile. Based on that, I know that I am extracting more value out of the points than it cost me to earn them because my CPM Burn Value is 1.633¢/mile and my earn rate is less than 1¢/mile.
Admittedly, this redemption does not represent great value but I do extract more value than the point cost which ultimately is a win.
These are the benchmark numbers that I personally use to determine if a redemption is a good deal:
- Economy Class Flight – should be worth at least 2¢ per mile. If you can find an economy redemption over 4¢ per mile, you are getting very good value.
- Business Class Flight – should be worth at least 5¢ per mile. If you can find a business redemption over 8¢ per mile, you are getting very good value. My most recent mini-RTW trip provided me a value of over 15¢ per mile so extreme redemptions are possible.
- First Class Flight – should be worth at least 8¢ per mile. I have yet to redeem for First Class but with the extreme cost of First Class, I would expect the average to be closer to 15¢ per mile. As an example, I searched for YYC-SEA-LAX-SYD on Quantas and the one-way value of the ticket without taxes was $9,875. I know that I can redeem 70,000 Alaska Airlines Miles to get that redemption so the value there is 14.1¢/mile ($9,875 / 70,000 x 100).
My general goal is to earn points at less than 1¢/mile.
If you are a nerd like I am, you may want to consider keeping a spreadsheet to determine what CPM you are earning your points at. This way, you can definitively know the average cost of each point in your portfolio which then allows you to make informed decisions on whether or not you are getting good value from your points at redemption.
As I mentioned in my last post, the name of the game here is to earn and burn so while I do recommend knowing how much your points cost, don’t wait around for the perfect deal to come along in order to squeeze those last few pennies out of your points. If the award is valued at more than you earned the points at, the flights are convenient and it goes to a destination you want to visit, go ahead and redeem.
You can always earn more points.
nice post. curious on your AMEX cost example. Shouldn’t opportunity cost of the required spending be included? For example the Amex gold FYF gives 25000 points, with 1500$ spending. Normally my spending would have been on a 2% cash back card (so i am losing $30), so isn’t my CPM
$30/26500*100 = 0.113 CPM
You could certainly calculate the opportunity cost as part of your equation but because everyone has access to different cards, it’s difficult to use those in the calculation. The standard nomenclature is to calculate cost/points without taking into account opportunity cost. Cheers
thanks. to me it is one of the big problem with many of these calculations, and presentations from so-called pundits (like everyone of them declaring best travel card, cards with 2.5% Fx) so i had high hopes when i started following your stuff as a self-proclaimed nerd, that correctness would prevail over “established nomenclature”
you did set yourself aside by using your example for the CPM use of points (not using an example with a $12,000 first class ticket you would never pay in your lifetime).
you do have so good stuff, so will continue to follow , and likely refer other people, just my 2 cents. looking forward to more posts
Thank you for your insightful comment regarding the calculation of CPM. What I would say about CPM is that there are two uses:
1. To brag about how much value you got out of your points
2. A metric to measure how successful you were at extracting value out of your points
I’ll profess that I have been caught up with the braggadocious nature of the points redemption game but have settled more into Camp #2. If you are in Camp #2, then as long as you measure CPM consistently throughout your award redemptions, you will be able to understand where good value lies and whether or not you are progressing as an award redeemer. Personally I feel that CPM is a personal measure that you keep track of yourself so you can make up the formula as you see fit. What I really care about is realizing more value for redemption than it cost me to earn the points.
The other issue with taking into consideration opportunity cost is not only calculating the opportunity cost vs using a cash back card but determining where do you draw the line. For example, if you go out of your way to purchase bus tickets at a Shoppers Drug Mart rather than from the ticket kiosk so you can get 2x points, do you take into consideration how much additional time it took you? As you can understand, the rabbit hole on this one is deep. That’s why I believe that as long as you are consistent, the CPM calculation is valid if you feel it is valid.
Can you comment on how to calculate CPP for hotel stays? Do you still take the tax out?
How does that calculation change if it’s a Cash & Points redemption?
Hotel CPM should be calculated with the tax in. So just take the total cost of the hotel in points and divide by the total cost the hotel would charge for the stay.
If it costs you $450 for the hotel room or 15,000 SPG, you could take $450/15,000 * 100 to give you a CPM of 3c/point.
For hotel stays, I try to shoot for about 2c/point which is usually a very good point redemption. Hope that helps.
Thanks a lot, that helps.
And for cash and points would it just be the cash portion/points cost * 100?