Three strategies to tackle hotel cancellations

September 13, 2016

Have you ever made reservations at a restaurant or hotel, only to cancel last minute? If the answer is yes (and we know it is), you are not alone. In this industry, cancellations are inevitable, but as long as we have solid revenue manage strategies in place, we can still set ourselves up for success. So how exactly does a hotel plan for cancellations?

The first move lies in gathering and analyzing your data. Unless you know who your customers are and how they prefer to book—via your website, an OTA (Online Travel Agency) or maybe through a travel agent—you won’t be able to accurately estimate if/when they will cancel or understand what their reasons are. According to basic revenue management principles, a hotel should begin their analysis by keeping close track of which channels their customers come from. Once the segmentation for your business is clear, you can begin to identify consumer trends for each segment.

For instance, OTA customers tend to have a much higher cancellation rate than those who book directly with the hotel. Simple explanation behind this trend is that OTAs offer a practical platform to compare options and shop around. When a potential guest finds 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.

For direct customers, the fact that most hotels offer free cancellation within 24 hours to arrival does give them the flexibility to keep shopping almost until the day of their stay. Not all customers will dedicate that much time and effort towards their search, but some definitely do. They can even create alerts on sites like Rate Drop that will inform them when prices fall.

While today’s well-connected online world has made it easier for customers to find your hotel, those same customers can also drop your hotel just as easily. Your best option is to relentlessly gather data and plan accordingly. Here are three main strategies you can apply towards your plan against cancellations.

1. Let the data guide the way

Hospitality is a very competitive industry and in order to be positioned at the front lines, a hotel has to remain relevant in the market. If most hotels in your competitive set offer free 24-hour cancellation as their general policy, then you too will inevitably have to do the same. As we mentioned earlier, online hotel booking through OTAs has allowed customers to change their minds as often as they wish. However if you have gathered data on your customer’s booking patterns, you will know in advance if or when your customers will cancel. Such patterns can be outlined based on segmentation, seasonality, or even down to day of week.

For instance, Tuesdays at your hotel might be your highest cancellation day due to increased corporate demand and their ever-changing schedules. If you are able to pinpoint which day of the week your cancellations peak and how many bookings get cancelled on average, then you can increase your overbooking limits accordingly and make the most of the increased demand for that specific day. Not all hotels will need to apply varying overbooking thresholds, but we can only know that if we track customer data.

Similarly, if you can identify a certain OTA with higher cancellation rates than others, you can develop revenue management practices around the data. Knowing that X percentage of those reservations will cancel last minute, you can increase overbooking thresholds for your entry level room categories or raise your rates based on booking window and channel rather than booking density.

Alternatively you might want to discourage guests from cancelling by implementing less forgiving rate policies, such as 7-day free cancellation after booking (instead of up to 24-hours before check-in) or Advance Purchase (no changes or cancellations allowed) with a certain discount. Which one you offer will most likely depend on what is typically offered in your market. Most hotels prefer to offer a flexible policy along with a stricter one that comes with a slight discount of approximately 10% off the normal rate.

2. Special policies for group bookings

When a 25-room group calls to cancel their reservations, you have two options: reach for the panic button and wait for some form of revenue-recovering unicorn, or do what all revenue managers do and have your customer sign a solid contract with an outlined cancellation policy and fees. Since unicorns are rare, let’s assume you are going to go with a solid contract. Whether your customer is looking to reserve only ten rooms (typical industry minimum for a group) or book your entire inventory, the basic principle for that piece of business remains the same: it has to be profitable even when replacement is involved and you have to be protected against cancellations.

Members of a group might all check in together as a group or they might arrive individually. For those individual-arrival groups, a hotel should specify in the contract the minimum room-night number they have to  guarantee. For instance, a wedding group wants to book ten rooms at your hotel. All guests arrive separately and some want to stay only one night while others want to attend the wedding and then enjoy three more days. Contracting a minimum guaranteed room-night number (industry norm is 80% of the total revenue group promises to bring) allows the guests to make plans more flexibly and the hotel to have a safety cushion in case more members of the group cancel than anticipated or the group cancels altogether. Even though you would likely have to sell the cancelled rooms at a highly discounted last-minute rate, you would still receive the minimum revenue you were guaranteed in the group contract.

It is also important to remember that 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. Such discounted rates that are not publicly available on the internet or elsewhere could get some guests overly excited and before you know it, a friend of a friend of a distant cousin of the groom might be taking advantage of the group’s discount. A contract will protect you against such overbookings.

3. Accounting for special days and events

Every city has special events happening throughout the year that create a peak in regular demand cycles. Religious and national holidays, conferences, festivals, entertainment and arts events, big sports events such as the Super Bowl or the Olympics are all good examples for recurring and one-time events that cause a demand spike in a city.

If your city has such a demand-increasing event, you might want to be less flexible with cancellations and overbooking. Some hotels, depending on their proximity to event locations and their popularity among event attendees, might even get away with no-cancellation policies. Luckily, current hospitality systems allow revenue management teams to implement varying cancellation and overbooking policies based on day of week, special packages, or even down to the different room types. With such flexibility offered by technology, it is easier than ever to maximize revenues during special events and protect your hotel against lost revenue due to cancellations.

However, you must be careful not to overprotect your rooms with super strict cancellation policies. It is very common for hotels to be left with unsold inventory on their hands during special events if they overestimated the increased demand for such events. Best way to gauge demand as realistically as possible is to utilize industry reports for recurring events taking into consideration the shifting of day of week. Historical data on these reports will give you a solid expectation to base your strategy.

One good example for such a special event is Valentine’s Day. If February 14 falls on a Wednesday, chances are that couples won’t go out of their way to celebrate their special day with a hotel getaway, which means hotels should offer flexible cancellation policies to encourage more bookings. On the contrary, a weekend Valentine’s Day will increase demand and consequently competition among hotels. Having a stricter cancellation policy will discourage guests to shop around for last-minute discounts offered by competitors who couldn’t sell out and are fishing for potential customers.

It all comes down to data

Profitable hotels are ones that know exactly where their customers come from, how far out they book, and how many of them will end up cancelling. Tracking and internalizing these metrics allows the revenue management team to plan accordingly and be prepared for the worst. That way, if that notorious cancellation notification comes, there are no surprises and they can simply say, “I know.” Knowing is everything.