First, free cancellation is an added benefit to the customer and it’s only fair that they should pay more for this.
Secondly, it helps to segment your guests – allowing those that are happy to pay more to pay more.
And thirdly, the more you charge for it, the more likely it is that the people who pay for it are those that are going to cancel. Because of this you should always charge more than fair value. In economics terms, there is what is called ‘Information Asymmetry’. They know more than you about their intentions than you do, so the ‘fair value’ is too low.
This part is explained more on the tool page. The problem can be simplified to look at just four numbers.
The first question is what proportion of your guests (those that you gave free cancellation to) cancel in a period that can cost you money? Costing you money here means that you would possibly be unable to replace them if they cancelled. I call this period two weeks in the form to simplify, but use whatever time period is appropriate for your hotel.
The second important number is how much of that lost revenue can you recover? Sometimes you would be able to replace that guest before the night of stay arrives, but sometimes not. Out of the 10 people who cancelled within the two weeks mentioned above, you might find that on 5 occasions someone else later booked their room.
If we surmise that half the time you can replace the guest and they pay the same amount as the original guest, then that number would be 50%.
The third number is quite difficult to calculate; it is the proportion of people who would not have booked your hotel at all were free cancellation not available. This number is important because this is a large part of the profit your hotel can gain from free cancellation.
These days a lot of hotels do offer free cancellation and many people put it as a precondition of booking. These people would rather book your competitor if they are offering free cancellation and you are not.
The fourth and last important number is your expected occupancy. How busy are you going to be?
If you are definitely not going to be full then free cancellation costs you nothing versus the client not booking in the first place. You haven’t had to turn anyone away because of this person’s booking.
Also, the people who book your hotel because of free cancellation (see number three) are definitely generating extra profit, as you would not have been able to sell their beds to someone else.
The fuller you are expected to be, the more chance there is that offering free cancellation ends up costing you money.
If you can make a good approximation for these four numbers then you can get an idea of the benefits and costs of offering free cancellation.
I really hope so. As I said before, it is a complicated calculation, but hopefully you have a little more understanding now than you did before you started reading. By testing different numbers in the calculator you can get an idea of what works for you and what doesn’t.
Good luck and I hope you found this helpful.
Also, if you like tips like this, why not download our 49 Tips and sign up for our free email below? You can cancel at any time.