When it comes to vacation rentals, it’s long been established that the more flexible you make your cancellation policy, the greater your chance of receiving bookings. Of course, that may be fairly intuitive – guests want the most financial security possible when they’re booking a holiday, especially if unforeseen circumstances might end up leaving them several thousand euros out of pocket. Since the outbreak of COVID-19, this requirement has only increased. The sheer level of disruption and uncertainty around travel over the past twelve months has meant that guests don’t just prefer flexible cancellation policies, they demand them.
Indeed, it’s no longer enough to offer partial refunds up to a given period of time before the check-in date. In order to secure bookings during this difficult time many channels, OTAs and rental hosts are pushing Free Cancellation policies for their vacation rental listings. The logic behind this is pretty sound: guests simply don’t know if they’re going to be able to travel, either due to restrictions, illness or financial security. However, it’s a buyer’s market – with fewer guests travelling, hosts are forced to provide more competitive offers. Given the choice between partial reimbursement and the possibility of a full refund if things don’t go to plan, it’s obvious what guests will choose.
But what does this mean in practice for property managers? At least with partially refundable policies, hosts could be sure they’d be bringing in some revenue even if a booking got cancelled. But with guests now demanding free cancellation options, how might your revenue be impacted?
We’ve dug through our booking data to discover whether Free Cancellation policies actually increase bookings, how these bookings may differ from others, and what that all means for you as a host.
What are Free Cancellation Policies for Vacation Rentals?
First up, it’s probably worth defining what we mean when we say “Free Cancellation”. They’re also known as “Fully refundable” bookings, and we’ll use both terms interchangeably throughout this article. This refers to a booking wherein a guest can receive all of their money back (perhaps apart from administrative fees in some cases) if they need to cancel. However, there is almost always a window of time where this is possible, perhaps up until 7, 14 or 30 days before the check-in date. After this period, guests usually can’t receive any refund at all, though some channels have started experimenting with blended policies wherein full refunds are offered up to a certain point, with partial refunds thereafter.
It’s important to note that we’re not talking about Extenuating Circumstances cancellations here. Bookings cancelled due to Extenuating Circumstances or Force Majeure, such as the Coronavirus pandemic are almost always subject to full refunds, regardless of what the cancellation policy of the listing was at the time of the booking. Extenuating Circumstances were invoked earlier in the COVID-19 crisis for bookings made before the outbreak, but most channels now do not consider cancellations due to COVID-19 to fall under Extenuating Circumstances because guests know the risk of future travel bans.
Do properties with Free Cancellation receive more bookings?
When it comes down to it, the main purpose behind offering fully refundable bookings to your guests is to receive more bookings. Does it work? Yes – and the difference is stark.
Your.Rentals introduced fully refundable booking options in June 2020. Since that time, the proportion of bookings we’ve received for free cancellation properties has risen steadily, and in January 2021 surpassed all of our other policies combined.
January 2021 - Bookings of Fully Refundable Cancellation Policy listings
% of Bookings by Cancellation policy type
Of course, those initial months don’t look so impressive at first glance. However, that’s because this graph doesn’t take into account the number of our properties which offer free cancellation.
% of Listings by cancellation policy type
As you can see, listings with free cancellation policies still make up less than 25% of our overall portfolio. And yet they’re responsible for more than half of all bookings in 2021.
We did some analysis to compare our booking conversion rate for properties with different policies, and found that listings with free cancellation policies have converted on average 4.2 times better than partially refundable since June. Guests are understandably cautious about booking travel at the moment, so it’s telling that the properties that are showing the strongest performance are those which offer some financial peace of mind. In January 2021, listings offering fully refundable policy cancellations are seeing booking demand at 92% of the normal level (i.e. what we’d expect without COVID), whereas those on Partially or Non Refundable policies are seeing demand at just 23% of the norm.
Booking conversion rate by Cancellation policy type
This isn’t going to be a short-term trend either. In many ways, bookings are returning to a relatively “normal” pattern – apart from when it comes to cancellation policies. Throughout 2020, the booking window shrunk dramatically, with the average time from booking to check-in reducing from over 100 days to less than 50. Guests were booking at the last minute, and other metrics like length of stay and booking value were very unpredictable. With things beginning to recover, the booking window is now roughly in line with what we’d normally expect at this time of year, but that hasn’t reduced the appetite for fully refundable bookings whatsoever.
It’s also worth bearing in mind how sales channels and OTAs display properties. Listings which perform well get boosted up the search result pages, and in turn are more likely to receive more bookings in future. Given that the listings that have been converting at the highest rate are those with Free Cancellation, it will be increasingly difficult for those with partially refundable policies to stand a chance of ranking highly in search results. As more and more sales channels start supporting (and then prioritising) Free Cancellation listings, this trend is only going to continue.
Are bookings with Free Cancellation different from those without it?
Let’s address the elephant in the room. If you make it easier for guests to cancel, you’re going to get more cancellations, right? And if you’re offering fully refundable cancellations, you stand to lose your entire revenue for those cancelled bookings. Well, again we need to look at the data.
The first thing to say on this front is that it’s too early to accurately compare the cancellation rates of bookings with different policies. This is because many channels and services (ourselves included) only started offering Free Cancellation policies during 2020, at a time when cancellation rates are significantly different from the norm and inherently unpredictable. We’d recommend monitoring the situation for at least one full calendar year to take into account seasonality in different markets.
Keeping those caveats in mind, the limited data available suggests that yes, bookings made with fully refundable cancellation policies are cancelled at a slightly higher rate than non-refundable or partially refundable bookings, but still well within tolerable limits. We found much the same thing with our previous research – more flexible policies do see a slight increase in cancellations, but this is more than made up for by the overall increase in bookings. And when doing a cost-benefit analysis the picture becomes a bit more nuanced.
For example, fully refundable bookings have a significantly higher average booking value, bringing in around 18% more revenue per booking than partially refundable bookings. It’s not hard to figure out why – the more guests spend, the less willing they are to risk losing the full amount in the event of a cancellation. What does that mean for rental hosts? Well, if you’re unable or unwilling to offer Free Cancellation to your guests, you’ll likely have to compete on price and thus accept a lower revenue per booking. If you can offer Free Cancellation, guests are often willing to pay a higher price.
Additionally, many channels and providers are starting to offer guests multiple booking options – for example, charging one rate for partially refundable bookings and a higher rate for fully refundable ones. Your.Rentals will be rolling out this functionality for supported channels in the near future. While it is anticipated that the cancellation rate on fully refundable bookings may be higher, the data we currently have suggests that increased revenue from these bookings will cover that.
How do I protect myself from increased cancellations?
Whilst there are obvious benefits to offering fully refundable bookings, there are of course things you need to consider before you adopt these policies. Firstly, if you are managing properties on behalf of an owner or third party, you must check that your contract doesn’t prevent you from doing so.
Secondly, you should consider the booking window – how far in advance do you expect to receive bookings (taking into account the unusual circumstances we currently find ourselves in)? This will help you decide how generous you want to be with your cancellation policy. In Your.Rentals, you can offer Free Cancellation up to 7, 14 or 30 days before check-in. The more generous you can be, the more likely you are to receive bookings, though you must consider how that might affect your cancellations and how likely you are to be able to fill dates at the last minute.
Thirdly, you might want to consider adapting your rates to accommodate more generous cancellation policies. We’ve already discussed how listings with Free Cancellation can afford to charge higher rates for bookings. You may wish to increase your nightly rates to offset the potential risks of these policies. You should also expect to see more channels rolling out dual offers for the same booking – one price (higher) for free cancellation and another price (lower) for partially refundable or non-refundable bookings.
When considering all the data, a clear picture emerges. Listings which don’t offer Free Cancellation are performing extremely poorly, whereas those which allow guests to receive full refunds are approaching pre-pandemic levels of performance. Given the way channel algorithms favour high-performing listings it’s forecast that these listings will continue to perform strongly and non-refundable listings will slip further down the rankings. It remains to be seen how these policies may impact cancellation rates and overall revenue, but the data currently available suggests that any increases in cancellations will most likely be offset by the increased booking conversion. Free Cancellation has become the norm, and it’s unlikely to be going away anytime soon.