Should Hotels Apply Strict or Flexible Cancellation Policies?

“In my opinion, more often than not, strict cancellation policies are a representation of fear not facts, i.e., the fear of rooms being empty. Denying the fact, restrictions represent booking barriers. Your cancellation policy might hinder you from selling the rooms in the first place or from selling at the highest possible rate. Therefore, I will always try to have the least strict cancellation policy on the Best Available Rate in my market. Usually, this will result in a faster booking pace and a higher Average Daily Rate.”

“In competitive markets like the Maldives, where hotels and resorts face increasing pressure from an expanding supply, competition strongly influences a property’s approach to cancellation policies. Guests now have more options than ever, and often compare policies before booking. Recently, the Maldives has seen significant growth in accommodation options, including a rise in guest houses offering lower prices and more flexible payment terms. This shift has diverted some business away from resorts.

Traditionally, luxury brands providing premium services would implement stricter cancellation and payment policies. However, due to this competitive landscape, many luxury brands in the Maldives have started to offer more flexibility in both cancellation policies and payment terms to remain competitive and attract guests.”

“In general, travellers want or need more flexibility than ever before. With shrinking booking windows, offering choices to guests based on policy is a great way to fence discounts. In a leisure market in particular, it’s vital to be aware of the cancellation policy of the competition – not to blindly copy them, but to understand how their policies may impact their pickup and booking window, compared to yours.

Saving the strictest policies for the highest-demand dates is a good way to mitigate risk. Taylor Swift coming to town? Major NFL game? That’s when to implement a pre-paid and non-refundable policy. However – be careful not to layer too many restrictions on top of each other. For example, to have an inflated retail rate, a minimum-stay requirement, and a non-refundable policy will really inhibit bookings; pick one or two unless it’s one of those mega-demand dates.”

“Strict cancellation policies offer key benefits for hotels, including revenue protection by minimising last-minute losses and stabilising booking forecasts. They also help to manage demand, especially in peak seasons, as guests who commit to a stricter policy are less likely to cancel, reducing the risk of empty rooms.

However, the risk lies in alienating customers, particularly those who value flexibility, which can reduce booking conversions, especially when competitors offer more lenient policies. Why? Because, as you know, competitive positioning plays a critical role. When rival hotels provide flexibility, a rigid policy may deter potential guests. To balance these factors, the best practice you can implement is tiered cancellation options, allowing guests to choose from flexible to non-refundable rates. This approach aligns with demand while accommodating different guest preferences, effectively boosting both revenue and customer satisfaction.”

“Strict and restrictive cancellation policies create the risk of turning business away, especially when competitors offer more flexible policies. Hotels with competitive advantages might have a position to apply strict policies and high rates during certain events or seasons, but generally, it is recommended to align cancellation policies with the competitive set.”

“At RevenYou, we work with a wide variety of hotel, motel, and caravan parks across APAC. When reviewing an accommodation provider’s cancellation policy, we always start with the competitor set. What is their norm and what have they applied to different pricing plans?

Unless the provider is the market leader, they will need to stick with the market and have the same policy on their Best Available Rate as their competitors. Packages, promotions, and peak demand times offer hotels the chance to test and evaluate the success of different policies. For example: close all flexible rates for New Year’s and only have a fully prepaid, non-refundable package available for sale.

For now, I do not see hotels returning to a time when the standard pricing strategy was BAR and a non-refundable advance purchase. Corporate and frequent travellers have adjusted their expectations, and loyalty is low. Customers will shop around and move locations when they don’t find what they want. Our lead times are so low that customers cancelling two to three days prior to arrival still gives adequate time for resale. Utilising a payment gateway to check card validity also protects a hotel from lost “no show” revenue.”

“The risk of applying strict cancellation policies when the market does not do this, is a lack of / decreased pick-up for your property. However, it is important to keep watch on where the cancellations are coming from, because with less strict policies, we can also see an increase in cancellations. You can, for example, restrict bookings with a length of stay longer then 7 nights (of course, not for long stay concepts). We can see many via cancellations in cities, and restrictions on the length of stay reduces those ‘fake’ bookings. Check which nationalaties / segments are producing many cancellations and see what you can do to limit those.”

“There is not a simple answer to when and how to implement cancellation policies. The best uses of cancellation policies depend on many factors, such as last minute pick-up, time to reservation date, occurrence of events that drive occupancy, overall demand, and practices in the market.

Cancellation policies can help stabilise reservation booking patterns. However, they can also discourage sales. If two hotels are identical in pricing, amenities, location etc., but one has a strict cancellation policy and the other hotel has a more flexible cancellation policy, potential guests will choose the hotel with more flexibility in reservation cancellations.

Guests are also not happy when they must cancel a reservation with a strict policy, thus forfeiting deposits or incurring a penalty fee or charge. Frontline employees often receive the brunt of the guest dissatisfaction in these instances. Hotels should always weigh the long-term value of the guest against the short-term revenue of the cancellation penalty. Hotels could offer an alternative date for a guest who desires to cancel, moving the deposit with the reservation, as a balance of guest satisfaction and revenue.

When should hotels and resorts implement strict cancellation policies? When demand is in excess of 100% and/or when opportunities for last-minute pickup are very limited, such as an island resort. For special events when demand is extremely high, tight cancellation policies should be used on all but the long-term or high value guests. While the practice in the market is often used as a justification (all the other hotels are doing it), if demand and last-minute pick up do not support their use, hoteliers could extend more flexible policies to differentiate a hotel against competitors in the market.

Most hotels now offer a variety of room rates with an accompanying variety of reservation cancellation policies. Guests can choose a lower room rate with a stricter cancellation policy or higher room rates with more flexible cancellation policies. In these cases, the decision about cancellation flexibility is made by the guest, reducing some of the upset when a cancellation occurs. Note the word “some.” Potential guests are typically still upset when a cancellation becomes necessary.

Cancellation policies are a form of inventory management and should be implemented and evaluated in the same manner as room rates.”