Free cancellation, flexible, strict – which cancellation policy is best for you (and your guests)?

As a vacation rental manager, you live, eat, sleep and breathe bookings. “Number of Bookings” is almost certainly one of the KPIs for your business, and probably greatly influences the quality of your sleep at night!

But along with bookings comes the inevitable headache of cancellations. Cancelled bookings are frustrating for everyone, whether they are cancelled by the guest or the property manager. Guests have to find new accommodation, and property managers end up with unexpectedly empty nights in their calendar. As well as all this hassle, cancellations also raise the complicated topic of refunds and cancellation fees.

Cancellation policies

One of the main ways property managers can attempt to combat cancellations is through choosing a Cancellation Policy. A cancellation policy is essentially an outline of the rules and procedures for what happens if and when a booking is cancelled. It details how cancellations should be made, and how much (if any) money would be owed if a booking is cancelled. Many cancellation policies are quite complicated, with different rules depending on how many days before check-in the booking is cancelled. There are often different conditions depending on which party cancelled the booking, and why. For example, a guest may only be allowed to cancel the booking free of charge under exceptional circumstances such as major illness or injury, or under Extenuating Circumstances during/post COVID-19.

Choosing a policy

Your choice of cancellation policy is very often determined by how the booking is made. If you are receiving bookings directly from your guest (such as through your own website), you’re free to choose whatever cancellation policy you like (subject to local laws and regulations of course!). However if you use a sales channel or online travel agent to receive bookings, you most likely have to abide by their cancellation policy.

In some cases, you have a few different options for your guest cancellation policy. All websites work differently, but generally you can think of policies of being somewhere on a scale from Flexible to Strict. This is determined by how far before check-in a cancellation can be made, and how much money the guest can keep if they cancel a booking.

Let’s take Your.Rentals as an example. Property managers use Your.Rentals to create a listing for their vacation rental property and then publish it on dozens of websites and manage their bookings in one place. Your.Rentals has five general guest cancellation policies you can choose from:

• Flexible – 50% refund up to 7 days prior to check-in
• Moderate – 50% refund up to 14 days prior to check-in
• Strict – 50% refund up to 30 days prior to check-in
• Free 7 days – 100% until 7 days prior to check-in
• Free 14 days – 100% until 14 days prior to check-in

For all of these, the cleaning fee, taxes and optional extras (such as a breakfast upon arrival) are always refunded and the Your.Rentals service fee is non-refundable. As well as this certain channels set their own cancellation policies. For example, TripAdvisor allows guests to cancel bookings free of charge up to 60 days before check-in, and within 24 hours after the booking is made. This means bookings you receive through this channel are subject to this rule instead.

Flexible or strict?

If you’re worried about the effect cancelled bookings might have on your revenue or the operation of your business, it might seem logical to opt for the strictest possible policy. By making it difficult to cancel a booking without losing money, you might think you are discouraging guests from cancelling their bookings.

And admittedly, the data does support this.Around 12% of Strict bookings are ever cancelled by the guest. But by looking only at cancellation rate you might be missing the bigger picture.

Whilst stricter property listings do have fewer cancellations (average cancellation rate is 15.7% including the COVID-19 period so far), they also have the fewer bookings made – by a long, long way. These cancellation policies may discourage guests from cancelling bookings, but they also discourage guests from making those bookings in the first place.

It makes sense right? Many bigger trips are often booked weeks or even months in advance. Guests don’t know what might happen in the future, and they definitely don’t like the idea that they could be out of pocket if things change unexpectedly.
More flexible cancellation policies are much more appealing to guests, as they know that they could cancel if they really needed to. It’s all about making the booking process stress-free for your guest. Remember they could be dropping a large amount of money on this booking and anything that makes them hesitant could mean that they are more inclined to look elsewhere.

Do flexible cancellation policies lead to more cancellations?

As we already mentioned, the stricter the policy the fewer the cancellations. But is the opposite also true? Do flexible-policy bookings have more cancellations?

In short, yes. But actually, hold on a second.

Whilst flexible or moderate policies do see a higher percentage of cancelled bookings than strict or super strict, both remain at very acceptable levels. It is around 13% and 19% of these bookings are cancelled under moderate and flexible policies respectively, suggesting that there isn’t actually a great increase in cancellation rate when you give guests more freedom.

However, the benefits definitely are noticeable. Properties with a Flexible cancellation policy receive more bookings than all other policies. That means that property managers who opt for more flexible policies can get more bookings, whilst only risking a small increase in potential cancellations.

It’s worth remembering that even with a flexible cancellation policy, if a guest cancels their booking 8 days before check-in you’ll still receive 50% of your payout. And, since last-minute bookings are becoming more and more common, it’s much more likely that you’ll be able to fill those dates anyway, especially if you’re located in an in-demand area.

How to get bookings during COVID?

According to our booking data, over the period August – October, our hosts who had enabled Free Cancellation 7 days before check-in had a booking conversion rate at 10.5% and those allowed Free Cancellation 14 days prior to check-in got an even better conversion rate at 21%. In contrast, those who adopted a Strict policy only converted 5.5% of their bookings.

The increased booking conversion of Free Cancellation policies vastly outweighs the small increase in refundable cancellation. 

As such, we are recommending our property managers and hosts to adopt a Free Cancellation policy (Free 7 days/14 days)  and allow the guests to get a 100% refund if they cancel their bookings 7 days or 14 days before check-in. 

According to Booking.com, properties with free cancellation can typically see up to 3% more conversions from “looker to booker”. Any partners who join their programme can sell almost 30% more room nights. 

In addition,we see that over 50% of our bookings have been made within 14 days of check-in since October. As last-minute bookings are becoming more and more common, it’s much more likely that you’ll be able to fill those dates anyway, especially if you’re located in an on-demand area.

Summary

Cancelled bookings can be very annoying for property managers, who lose out on revenue and have to find new guests to fill their empty dates. But selecting a strict cancellation policy as a way of preventing this is a false economy. By switching to a flexible cancellation policy you could more than double the number of bookings you receive, without seeing a noticeable increase in cancellations!

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