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The real cost of ‘free’ cancellations

Last-minute cancellations are on the rise as the result of programmes from major OTAs, but how can hotels prevent this and create more direct bookings?

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The real cost of ‘free’ cancellations

Last-minute cancellations are logistical and financial headaches for hotels, but ones that have always been a necessary evil within the industry. After all, plans can change with no warning, volcanoes can spontaneously erupt, and other unavoidable occurrences mean that flexibility can be a deciding factor for prospective guests choosing your hotel. However, cancellation policy has evolved in recent years from a footnote on the booking confirmation to the basis of entire OTA marketing campaigns, designed specifically to position agencies as the most risk-free option for guests.

A recent study by D-EDGE into reservation revenue has shown that the overall cancellation rate across all channels has risen by 6% over the past four years, reaching a peak of almost 40% in 2018. That may sound like a death knell for predictable occupancy - and indeed it may be, for hotels who generate a large majority of their bookings through OTAs. The 40% average is heavily skewed by the high cancellation rates on reservations from Booking.com and other OTAs. In comparison, the study found that only 18.2% of direct bookings were cancelled in advance.

These statistics are unsurprising given the vastly different approach taken to cancellation policy by hotels and OTAs. While cancellations affect a hotel’s ability to forecast revenue and impact their income in real terms, they are used by OTAs as a marketing tool - one that benefits their growth, rather than hinders it. Flexible reservations are at the heart of how Booking.com sells rooms to its users, and a year-on-year increase of their cancellation rate is proof that their message is clearly resonating. How did we get to this point, and what can hotels do to take back control of not only guest acquisition, but also guest confidence?

A changing industry

It’s symptomatic of a market heavily dominated by third-party distributors that hotels are often forced into a tight spot that encourages them to prioritize short-term gain over long-term stability. We’ve seen it before with programmes such as Booking Genius, where hoteliers are encouraged to take part in a discount scheme in order to fill low-occupancy dates or access a ‘higher-quality’ group of guests. As a result of many of these initiatives, the immediate positive impact is often outweighed by the wider cost to the business of offering lower rates on an OTA than on the direct site.

In early 2018, Booking.com introduced ‘Risk Free Reservations’, a service which offers hoteliers the opportunity to enhance non-refundable bookings with free cancellation. If the original booker changes their reservation, the OTA will attempt to find an alternative guest to replace them before the stay date. If a new visitor cannot be found, Booking.com will take the monetary hit and pay the hotel for the empty room. In the short term, this may seem like a great deal - as well as greater visibility on the OTA’s index (hotels with non-refundable rates will still appear when a guest filters by ‘Free Cancellation’), hotels can stay competitive whilst guaranteeing occupancy or, at the very least, compensation for a last-minute cancellation that cannot be fulfilled.

The ‘Risk Free Reservations’ policy is born out of the core aim of making the booking experience as painless as possible for guests - something that both hotels and OTAs are firmly aligned on. OTAs have introduced programmes like ‘Booking Genius’ and ‘Risk Free Reservations’ to achieve this, but it has to be remembered that their ultimate goal is to ensure customer loyalty to their own brand, not to maximize the profit of the hotels they partner with. This means that while the programmes have some benefits to hotels, they can also have a number of unforeseen consequences that can cause concerning long-term challenges.

The long-term cost of short-term gain

In reality, ‘Risk Free Reservations’ have the potential to damage a hotel’s brand integrity, increase their dependency on third-party partners and ultimately hurt their bottom line in the long run. Mirai's excellent article, published when the scheme was first announced, makes clear how 'Risk Free' rates on Booking.com can undermine your own hotel’s direct prices as they cannibalize more expensive flexible rate. The programme could also cause confusion if Booking.com has rooms available when even your own website does not, resulting in long-term reputation damage that significantly outweighs any short-term benefit.

Risk Free Reservations price comparison graph

'Risk Free Reservations' lead to disparity between Booking.com and direct sales (source: Mirai)

The rise of cancellations is a symptom of a growing imbalance of power between hotels and OTAs. Even beyond landmark policies like ‘Risk Free Reservations,’ OTAs are constantly shaping the ways in which guests approach the task of booking a hotel, at the expense of the hotels who supply them. Drawing on ecommerce tools from other industries, OTAs have shifted the hotel buying process from a tailored, measured and personal one to an experience designed to make guests book as fast as possible or risk missing out. The ideal hotel website journey combines these elements, with an emphasis on guest satisfaction at the center of the experience - but OTAs are actively encouraging potential guests to ‘book first, ask questions later’. Without strategic investment in offering guests an attractive, viable alternative booking option to OTAs, hotels will continue to be at the mercy of the expectations OTAs set in the minds of guests.

Taking the power back

If hotels are going to decide the future of their own industry, short-term incentives have to be balanced against the need for long-term stability - and for the majority of hotels, long-term stability will require a self-sufficient channel of direct booking revenue. However, while you can invest in the most descriptive, engaging and intuitive website possible, guests will never choose you if are ‘offering an intermediary better conditions than your direct sale’. Cancellations are the most pressing example of this, and the perfect place to start for any hotels looking to grow their direct sales with the best possible proposition they can offer to prospective guests.

Firstly, while it’s the hotel that is most acutely affected by the impact of cancellations, it’s also the hotel that sets its own terms. It’s clear that a more proactive approach is needed - it’s down to you to dive into your own data and see how cancellations across different channels are affecting your hotel’s revenue. If you’re part of the ‘Risk Free Reservations’ scheme, it’s also worth comparing the quality of replacement bookings against non-refundable guests - you may be surprised by what you find. If you’re being stung by the financial impact of late cancellations, consider setting stricter policies in terms of dates or rates for bookings, such as non-refundable or flexible until a certain time before check-in, is a start - as is opting out of any schemes such as the ‘Risk Free Reservations’ programme. The pressure from OTAs and the competition within the industry may be significant, but the long-term reputational and financial benefits far outweigh any short-term challenges.

Using Triptease Targeted Messages to encourage direct bookings

Use Targeted Messages to give guests a bespoke incentive not to cancel their booking

Next, engaging with the reasons why people are cancelling is crucial. Make the most of the statistics at your disposal - for example, what percentage of bookings are being cancelled, by who, in what rooms, and from what source? While this shift in the industry means it’s easier than ever to change a booking, each cancellation is still done for a reason. Ensuring you’re offering the best possible price to guests is vital, and sometimes reaching out to reluctant visitors is the only way to identify issues that are causing people to lose confidence in the service you provide.

Once you are confident that direct booking offers guests the best possible deal, the next step is to foster their trust. Cancellations take place primarily because that visitor does not believe your hotel can handle their needs, and so demonstrating excellent, personalized service from the outset is a sure-fire way to remove any lingering doubts. Utilising the Targeted Messaging and Chat features within Triptease gives you a way to engage with prospective guests and their questions directly, as well as to offer discounts and promotions that help them to make up their mind well in advance. It’s incredibly hard to control and curate the customer journey on third-party websites, and so providing guests with confidence in your hotel from the outset is an incredibly effective way of securing their patronage.

Create a true connection with your guests

It’s easy to forget that guests dislike uncertainty as much as hoteliers do. Juggling multiple reservations and being unsure of where you’re going to be staying during a business trip or a holiday is a stressful experience, and one that people would generally like to avoid. As the cancellation statistics continue to grow, and OTAs carry on making the likes of ‘Risk Free Reservations’ an integral part of their brand, it can be easy to lose sight of the fact that this is not just an inevitable industry trend that must be accepted.

Beyond all else, hotels hold a massive advantage over OTAs in terms of providing an engaging journey for guests during the booking process. With millions of hotels to juggle at once, OTAs can never understand a guest and their unique needs with the same level of compassion, commitment and care that a hotelier can. Guests need a hotel they can trust, and there’s no better way to build this confidence than by giving them a personalized experience that they simply could not get elsewhere.

About The Author

Rob is a Product Marketing Executive at Triptease, managing the Retargeting product.

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