Hotel cancellations pose a great challenge

In recent years there has been a rapid increase in hotel cancellations. More and more frequently, guests tend to cancel their room reservation. In many cases the cancellation is free of charge up to 24 hours before arrival.

Cancellations often present a big challenge for hotel managers. Especially since the rise of online travel agents such as Booking.com, Expedia and Co. it became more and more common to enforce free cancellations up to 24 hours before arrival. On one hand, this policy brings a new dimension of flexibility to hotel guests, on the other hand, it means an increasing financial risk for hotels and difficulties while planning their occupancy rate. Due to these developments, it got more and more important to analyse cancellation behaviour of hotel guests and find a pattern in order to create a forecast.

What are the numbers telling us?

Based on the data provided by our software, we can validify the following statements regarding the cancellation behaviour of hotel guests:

Duration of stay

In general, it can be said that the booked period of stay has an actual impact on the risk of cancellation. The following applies here: If a room is booked for only 1 or 2 nights, it is more likely to be cancelled then if the length of stay is 3 nights or longer.

Time of booking

The time of booking also influences the cancellation behaviour. The longer a room is booked in advance, the higher is the risk that it will be cancelled. The actual amount of cancellations from early bookers rises approximately 1 month before arrival. 

Contrary, the so-called last minute bookings, which are made up to 10 days before arrival are less likely to be cancelled than the early ones.

The “Maybe booker”

“Just-in-case” customers are guests who book more than one hotels within the same region at the same time, to choose the best option at the last minute. This is usually up to 24 hours before arrival, as there is mostly no cancellation fee until then. For hotels it not only means more cancellations, but also a measurable additional effort for the reservation management and front office staff.

The bookings are being imported into the hotel program (PMS) by the reservation department or via channel manager, where they get checked and processed if necessary. In many cases, this process is linked with a prepayment. If the hotel booking gets cancelled the hotel staff has to undo all the processes, which also means refunding the prepayment in case the deadlines were met. Mostly, the hotel will still have to pay the disagio fees. Usually this is between 2 or 3 percent of the transaction amount, which at first does not seem like a lot, but extrapolated, this poses an unnecessary amount of fees.

Dealing with cancellations

Many hotels have come up with creative ways to counteract the trend of free cancellations up to 24 hours prior arrival. One Option is to offer several different rates and conditions at once. One of these is the Non-Refundable Rate. Although this rate is usually 10 to 20 percent cheaper than the hotel’s standard rate, it needs to be fully paid immediately and is not refundable.

Another focus is to generate more direct bookings via website. Not only does the hotelier avoid commissions from online travel agents like Booking.com who charge about 15%, but also it generates a stronger relationship between the customer and the hotel. Therefore an attractive concept and benefits have to be developed in order to guide the guest from going through OTAs to booking directly on the hotel’s website.

It is important to regularly check the settings of the cancellation policies on the different distribution channels. Make sure that cancellation conditions on the hotel’s website do not put potential guests at a disadvantage. The hotel’s own cancellation policy should be at least as good or even better than those of online travel agencies.

Inspiration from pioneers

Many airlines have developed creative approaches in order to be as attractive as possible for customers and minimize financial risks at the same time. One possibility is the temporary booking, which automatically expires after a certain amount of time. This approach helps bookers to identify possible options and clarify any uncertainties. The advantage for the vendor is, having the ticket not blocked until shortly before the travel date.

Another approach is the possibility of a rebooking, which can be done either free of charge or for an appropriate surcharge. The customer can then redeem these at another time. This strengthens the bond to the company and the customer is not losing his money. 

In the future, these possibilities will become more and more interesting for the hotel industry, if they have not been implemented already. The goodwill of the hotel is also a necessity in many of those cases. 

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