When was the last time you booked a hotel room? Did you book a flexible rate or a non-refundable? When was the last time you canceled a hotel reservation? How much notice did you give? Were you able to get refunded?
As a hotelier, there are a number of reasons why a non-refundable rate would be beneficial. Because of this, we see many hotels offering a discount for customers willing to lock themselves in. But in doing this, are we limiting our ability to earn incremental revenue on flexible rates? How flexible are the rates we are offering? Would you yourself, as a traveler, be enticed to book at your property given the cancellation policies in place?
Recently I was looking at different cancellation policies available at hotels in one market. Without drawing attention to anyone in particular, I will share with you some of the policies I found and why I believe they may not be the most effective.
Example 1:
Non-refundable rate is available 7 days and more prior to arrival for a discount of 15%
Flexible rate plan offers cancellation up to 72 hours prior to arrival
Now suppose that it is October 4th and I am looking to book for the same dates of October 11-13. The flexible rate is selling for $250 and I can cancel any time up to October 8th. The non-refundable rate is $212.50, but I am locked in. At this point, I am positive that I will be going away next weekend. The only thing that would stop me from traveling as planned would be an emergency or illness, both of which I wouldn’t be able to predict by October 8th. As such, I will either book the cheaper rate that is non-refundable, or I will look for a hotel with a more lenient flexible rate cancellation policy.
Example 2:
Non-refundable rate is available 3 days or more prior to arrival for a discount of 15%
Flexible rate plan offers cancellation up to 24 hours prior to arrival
In this scenario, I can’t imagine a world in which I would pay an additional 15% for two extra days of flexibility, unless it is because I am still shopping and hoping to get a better rate.
Example 3:
Non-refundable rate is available 35 days or more prior to arrival for a discount of 5%
Flexible rate plan offers cancellation up to 48 hours prior to arrival
For only a 5% discount, I am not sure I would be willing to forego the flexibility. Perhaps if the destination is one for which I have booked a flight and I am already locked in, a 5% discount may be better than not saving anything.
So, what is the best way to handle your hotel’s cancellation policy? Well, that depends. Are you hoping to use the policy to ensure guaranteed revenue by driving people to book your non-refundable rate plans? Are you using flexibility as a source of incremental revenue by trying to entice guests to book your flexible rate plan? Are the problems you are solving cost-based and having 3 days notice is the only way to manage your staff? Is there only one right answer?
In low season, perhaps having guaranteed revenue is preferable. With less staff and less reservations, a 72 hour cancellation policy may be the best bet for hotels in their periods of low demand. In high season, when everyone is looking to maximize revenue, perhaps offering more flexibility until the last minute is a win-win. Allowing customers to cancel and reopening availability for last minute channels can be a perfect solution in periods when demand is higher. In that vein, could we not fluctuate our incremental percentage for flexibility based on demand?
In a world where prices can be changed every 15 minutes, it seems counterproductive to have cancellation policies which are set in stone.
