Thursday, January 12

Does salience make sense for Air Miles?

Air Miles has decided to do a curious thing: tell you how much they're actually worth.

Air Miles, for those who don't know, is a customer loyalty program. If you shop at particular businesses, you earn "miles," which you can then redeem for rewards. Businesses use these programs in an attempt to retain customers. They're particularly useful when businesses offer a fairly generic product that customers could easily buy from a competitor.

Some reward programs rely on transparency. Credit cards that offer cash back, for example, tell you up front the percentage of purchases that you'll get back in cash rewards.

But it seems like most reward programs rely on obfuscation. Air Miles probably falls into this category. It's difficult to calculate how much an Air Mile is worth. Customers typically collect one Air Mile for every $20 spent, but one Air Mile does not equal $1 (or something similarly transparent).

Until now, Air Miles has only allowed customers to redeem miles for rewards, such as flights, magazine subscriptions, or ice cream makers (which I am currently considering blowing my miles on). So in order to figure out what an Air Mile is worth, you need to figure out what the reward is worth, and then do some math.

It's probably easiest to look at gift cards. A $20 gift card typically goes for for 175 Air Miles. If we assume that a $20 gift card is worth $20 (in reality, it's worth a little bit less), then I would need to spend at least $3,500 (175 Air Miles x $20 per Air Mile) to earn the gift card. In reality, I'd need to spend much more, since Air Miles are only doled out for every $20 spent. If I make a $19 purchase, for example, I'll earn zero Air Miles, not 0.95 Air Miles.

The $20 reward for a minimum $3,500 of purchases works out to less than 0.6% cash back in this best-case scenario, which doesn't seem like that much. Hence, it's not surprising why Air Miles tries not to be transparent about the value of their miles.

Starting in March, Air Miles will offer cash back. For 95 Air Miles, you can get $10 off a purchase at participating retailers. This makes the calculation a little more transparent. Earning 95 Air Miles requires a minimum $1,900 of purchases (95 Air Miles x $20 per Air Mile). That works out to a little over 0.5% cash back in the best-case scenario.

I'm surprised that Air Miles is making the change to cash rewards, since it makes it a little more obvious that their rewards are virtually worthless. One would think they'd be better off hiding how chintzy they are, rather than trying to showcase this.