Glossary: Cost Per Mile (CPM)

I’ve started a Glossary section to help explain important concepts so that you can get the most value from your miles and points and have Big Travel with Small Money!

Today we’ll cover Cost Per Mile or CPM and see why it is important to know your CPM.  CPM together with your Mile and Point philosophy will help you better estimate whether a mile and point deal is worth pursuing or not.

Note that Cost Per Mile and Cost Per (hotel) Point are calculated in the same way.

Cost Per Mile (CPM):

Quite simply, Cost Per Mile (CPM) is the cost of earning 1 mile or point, and is usually calculated in US cents.  For example if you paid $95 for  100,000 British  Airways miles by applying for the Chase British Airways credit card, your cost per mile would be 0.095 or about 1/10th of a cent.

This is calculated by using the following formula:

Cost of Acquiring Miles or Points (in US cents) ÷  # of Miles or Points Aquired

In the example above with British Airways, the CPM = 9500 (the annual fee in US cents) ÷ 100,000 (# of British Airways miles received)  = 0.095 cents

This assumes that you completed the $2,500 minimum spend requirements for the card without incurring any extra cost i.e. you used the British Airways Card to spend $2500 which you would have anyway spent within 90 days.

However, if you incurred a cost in completing the minimum spend, by say, sending money to a friend via Pay Pal than that cost should be included in the “Cost of acquiring Miles or Points”

For example, you paid $ 29.30 to send $1000 to a friend so that you could complete the minimum spend on the British Airways card and the friend sent you back $1000  In that case your CPM would be:

9,500 (British Airways Credit Card annual fee in US cents) + 2,930 (Pay Pal fee towards transferring $1000 to your friend in US cents) + 2,930 (Pay Pal fee for transferring $1000 from your friend to you in US cents) ÷100,000

= 15,360 ÷ 100,000 = 0.15 cents

Note that calculating the cost of a hotel point uses the same formula above.

Why is Cost Per Mile (CPM) important?

Knowing the cost of every mile and point you’ve earned is important because, only then, can you redeem your miles for a value ABOVE what you paid for them.

For example, if you acquired miles or points  at 1 cent a mile/point  (the earning rate from most credit cards) you would want to make sure that you redeem your miles/points to get a value of MORE than 1 cent per mile.  Because if you were to redeem your miles at less than 1 cent per mile, you would be losing money.

Knowing your cost per mile (CPM) will ensure that you get the most value from your miles and points.  Your miles and point philosophy should guide you in deciding whether it makes sense to acquire miles and points at a certain price or not.

Real-World Implications:

1) Signing -up for credit card mile and points bonuses will almost certainly benefit you – regardless of how you redeem the miles or points -  because your CPM is VERY low (or even $0 if the first year’s annual fee is waived!)

2) If you redeem your miles and points for less than 2 cents value per mile/point, you should re-evaluate using your travel credit card for EVERYDAY spending (as opposed to using it just to meet spend thresholds for mile and point bonuses).  This is because you can easily earn more by using cash back credit cards (like this 2% cash back card) which will provide you with more value.

Bottom line: Knowing your CPM will help you get more value out of your miles and points and will ensure that you earn and redeem miles only when it makes sense to do so

Stay tuned for the next in this series where I will discuss how to value your miles or points.

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