Many small hotel owners have mixed feelings about free cancellation. On one hand, by offering it you are undoubtedly increasing the number of bookings you get. On the other hand, it can mean being left with empty rooms at short notice.
Larger hotels have less of a problem with this, as they are able to overbook their rooms. But for small hotels, after all the hard work put in, being left with empty rooms in busy season is frustrating.
The majority of hotel guests use free cancellation respectfully; they appreciate the flexibility it offers them in case their plans change, and tell you well in advance if they do. However, some guests are more aggressive in their use of the option. Business customers, in particular, may wish to reserve the option of coming somewhere even if it is unlikely that they will actually come. They often want to keep that option open until the last moment.
There are also people who book in advance, but then cancel and rebook if they find something cheaper closer to the time. In this way, they secure themselves a free option; if prices go up they keep the price they booked for, if they go down then they can get the room cheaper.
What should you do?
The first thing to bear in mind is that offering free cancellation usually works out as very profitable for a hotel. It is only costly in very busy times, with high cancellation rates and where the hotel has not charged enough for the option. So, the first point to make is that most of the time free cancellation is a good thing.
But, at times that it isn’t good for you, you have three options:
Option 1: Don’t allow free cancellation in busy times
If you have a hotel that is particularly frequented by business customers, there is not always an easy solution to this. If you have a particularly high cancellation rate, you may wish to stop offering free cancellation during busy times. We offer a calculator here
to determine how much you stand to lose by offering free cancellation. If you can’t raise the prices by that much then you should not offer free cancellation, it’s as simple as that.
Option 2: Allow it, but extend the period that guests are not allowed to cancel in
Another option to consider is to allow free cancellation but only up to a week in advance. As with the above option; this is particularly important in busier periods. You can use our tool
to play around with the numbers to work out roughly at which point you still make money from offering free cancellation at all.
Option 3: Charge a lot for it
You could set different free cancellation costs for different times of the year. This helps to align the cost to you with the amount you charge the client.
What shouldn’t you do:
Some hotels have just one rate on offer for each room. Either this includes free cancellation or it doesn’t. This is a big mistake, from a revenue management point-of-view.
If you never offer free cancellation, then you lose out on the customers who will only book when it is offered. Often, these people are perfectly happy to pay more for it and very rarely use it.
If you always offer free cancellation, then you are failing to extract the full revenue potential from your rooms. Offering free cancellation is a way of segmenting customers – the more price-sensitive ones will make the cheaper choice and the less price-sensitive ones will pay you more. Both are happy with this and you have made yourself attractive to more people.
You could even offer three rates – one that allows free cancellation up to a week before, one that offers it up to 1 or 2 days before and one ‘Saver Rate’ that offers no free cancellation option at all.
Another thing not to do
is offer better cancellation options on online travel agents (OTAs) than you do on your own website. This means that people who want to book though you directly rather than going through the OTAs (and many do) are unable to. They’ll just go back to the OTAs and book there with better terms.
How does the free hotel cancellation tool work?
We have created a tool to help you work out the cost to you of allowing free cancellation. It is not a simple subject but we have tried to simplify it; however, you still may need to read the explanation a few times to fully understand it.
Our tool tries to work out the ‘fair value’ of offering free cancellation. This means, how much money will you make or lose by offering free cancellation. It is expressed in percent. If the fair value is, for example, 6% then what this means is that offering free cancellation costs you (on average) 6% of the price of your booking. If the fair value is -8% it means that offering free cancellation makes you (on average) 8% more revenue.
In addition to the ‘fair value’, we also give you a price we recommend charging. This price is set to be 5% more than the fair value, with a minimum value of 5%.