How to Set Up an Effective Hotel Cancellation Policy

In the fast-paced world of travel, one constant remains: change in guests’ plans. From unforeseen circumstances to a better deal down the street, cancellations are an inevitable part of the industry.

On one hand, you want to protect your revenue and maintain predictability but also offer flexibility to attract guests and build goodwill on the other. So where do you strike the balance?

The answer lies in a strong, effective and flexible cancellation policy. But is crafting one as easy as it sounds?

The answer is both yes and no.

Wait till I explain all the whys, whats and hows. 

So, let’s dig in right away.

What is a Hotel Cancellation Policy?

In simple terms, a cancellation policy is a statement given by a service supplier that explains the terms and conditions for cancelled services. It involves all the clauses as well as conditions of the penalties, actions, and refunds. 

Moving on, let us see:

What Are the Different Types of Cancellation Policy?

The cancellation policy depends on a wide range of factors, such as booking lead time, type of booking, and length of stay. 

Majorly, there are two major types of cancellation policies that hotels prefer:

1. The “cancel by certain date” policy

This type of cancellation policy gives your guests the option to cancel hotel reservations free of charge up until a certain date. Once this date passes, you can either charge:

• A standard cancellation fee
• Full payment for the reservation

2. The “one-night penalty” policy

This type of hotel booking requires the full payment of the reservation at the time of booking and is non-refundable. In this case, the hotel charges a cancellation fee equivalent to one night’s stay at the hotel. 

A majority of hotels adopt either of these cancellation policies. Other than this, most of the online travel agents (OTAs) have their own set of cancellation policies. Have a look at Airbnb’s different cancellation policies. 

If a booking is received from an OTA, then the cancellation policy of that particular channel is applicable. 

Similarly, if a booking is received from your website or is a walk-in, then your hotel’s cancellation policy is applicable. 

Since every hotel or accommodation provider has a cancellation policy, does this thought ever come across your mind – Why is it even important to have a cancellation policy?

Well, let me tell you:

How Important is a Cancellation Policy?

Cancellations are inevitable in our industry. Ours is a very competitive industry, and it’s the cancellation policy that will help your business to survive. 

Here are the reasons why your property NEEDs a cancellation policy. 

1. Provides Accountability 

It is an assured way to protect yourself from lost business and revenue. 

As discussed earlier, a standard cancellation policy should have a fee or penalty and enough time built into the cancellation notice so you can re-book the spot.

It will hold your customers accountable if they do need to cancel their reservation. 

When a policy is shared with the customer, then they are well aware of what can happen in case they decide to cancel.

2. Guarantees Commitment 

When your guests agree to a cancellation policy, then it shows a commitment to the booking on the part of the customer. 

If your guest books his stay and knows that there is a cancellation fee, then he may not cancel the reservation. 

3. Shows Professionalism

Many hotels have this mindset, that having a cancellation policy will get off their guests. 

However, that’s not the case. It’s OPPOSITE!

Your guests feel that having clear policies and details about booking depicts professionalism as a business.

Owing to these reasons, cancellation policy is a must!

Now that you know its importance, let me guide you on,

How to Create an Effective Hotel Cancellation Policy?

You need to have the right cancellation policy in place. Planning the best cancellation policy takes a lot of groundwork. 

I’ve broken down that into these simple steps:

Step 1: Understand your customer’s booking pattern

First thing first, you have to gather and analyze your data. 

Unless you know who your major targeted audience is and how they prefer to book: you won’t be able to estimate the reason behind their cancellation.

So first, you have to segment data by the booking sources and type of guests. 

Once that is done, you can begin to identify consumer trends for each segment.

For example, customers from the OTAs tend to have a higher cancellation rate than those who perform their booking directly with the hotel.

The reason is, that OTAs offer a practical platform to compare options and shop around.

When your guests find a hotel they like within their price range, they tend to book it right away and cancel later if they find a better (or sometimes cheaper) option.

On the flip side, there are fewer chances that your direct customers will cancel their reservations later. 

Besides, not all of your guests will dedicate that much time and effort towards their search, but some do.

Step 2: Derive the occurrence and time

From your hotel’s data, find out the particular day or season when you have received maximum cancellations. 

For instance, generally on Tuesdays, you must be receiving the highest cancellation because of any reason. 

If you can pinpoint which day of the week, then you can increase your overbooking limits accordingly and make the most of the increased demand for that specific day.

Similarly, if you can identify that a certain OTA has higher cancellation rates than others, you can rethink your OTA connections. 

When you know that X percentage of those reservations will be cancelled at the last minute, you can increase overbooking or raise your rates based on the booking window.

Step 3: Consider group bookings

When a 25-room group calls to cancel their reservations, you have three options:

1. Either you panic 
2. Or expect a miracle to happen
3. Or have a specific cancellation policy for the group bookings. 

The last option sounds sensible to me.

To save yourself from such a scenario, you can have a solid legal contract with all the required policies and clauses. 

Whether your customer is looking to book only ten rooms (typical industry minimum for a group) or book your entire inventory, the basic principle SHOULD remain the same.

It has to be profitable even when replacement is involved and you have to be protected against cancellations.

In the case of group bookings, the group members either check in together as a group or they might arrive individually. 

For those individual-arrival groups, you can specify in the contract the minimum room-night number they have to guarantee. 

You should also consider your group contract should protect you against overbooking by the group. 

If they originally wanted ten rooms and you offered them a special discounted rate based on a ten-room piece of business, they shouldn’t end up booking twenty rooms at that special rate.

IMPORTANT: Ensure that such discounted or special rates are not publicly available on the internet. 

Step 4:  Accounting for special days and events

Every city has special events happening throughout the year that create a peak in regular demand cycles. 

Be it religious and national holidays, conferences, festivals, entertainment and arts events, or enormous sports events such as the Super Bowl or the Jonas Brothers’ Music concert. 

If such an event is approaching, then I recommend you have less flexibility with cancellations and overbooking. 

During events, festivals and long weekends, some hotels get away with no-cancellation policies 

However, you have to be careful not to overprotect your rooms with super strict cancellation policies. 

One good example of such a special event is the 4th of July (American Independence Day- National holiday). 

If the 4th of July falls on a Wednesday, then there are fewer chances of any hike in bookings. 

On the contrary, if it falls on Friday or Thursday, it will increase demand for hotels. 

So, these are different factors that you have to consider while creating cancellation policies for your hotel.

Once you have created the right set of hotel cancellation policies, 75% of your work is done. 

Now you have to make your guests aware of your policy, and for that, you have to,

Where to Highlight These Policies?

Just similar to how your guests check the reviews first and then book a hotel with you similarly they are likely to check the cancellation policies before booking the stay with your hotel.

So, you must highlight your cancellation policies on different channels from where you are getting bookings.

And believe me, it is very simple: 

1. Share it on the social media handles
2. Highlight it on your website clearly
3. Mention them on OTAs and everywhere your hotel is listed

How to Manage Your Cancellation Policies? 

No other industry is as dynamic as ours. 

Now and then, there can be several things, incidents, and trends; which hotels have to keep a tab on. 

So, you should be ready to entertain all the cancellation/amendment requests. In case, your guests have paid any advance, try to refund the amount or give them credit in return. 

You have to UPDATE your cancellation policies. 

So, the point is creating a cancellation policy is not a one-time job. You have to revamp them constantly based on such unprecedented situations, during the time of festivals, events or long weekends, and in general as well.

Not to mention, when we talk about all reservations, cancellations, and everything in between, comprehensive hotel software is a must. And if you want to get a perfect solution for your hotel, here’s a guide for you.