This is the first in a two-part feature on cancellation impacts and how to mitigate their impact.
Cancellations are an inevitable part of the hotel industry but they have soared in recent times and bring with them more headaches for hotel and revenue managers. Much of this rise in cancellations is fuelled by OTA booking cancellation rates, and some hotels we have consulted with cite over 50% cancellation rates today for bookings made through OTAs.
In contrast, cancellation rates for direct bookings are significantly lower, although these rates too are rising for some hotels. Based on an analysis of hundreds of thousands of direct bookings across all of our markets, cancellation rates for direct bookings now stand at an average of 12% as of March 2019, and have been noticeably rising since the beginning of 2017. The cancellation rate varies with lead-in time, but more on this later.
Huge variation across hotels
Cancellation rates vary a lot between hotels, and this is significantly impacted by the strategy that the hotel employs. Hotels that adopt a robust direct booking strategy tend to experience less cancellations across the board and experience a far more profitable bottom line since they more actively control distribution and therefore exposure to OTAs.
This is in contrast to more passive hotels, some of whom do nothing even on the hottest high-demand dates, and others who deal only tactically with the impact of cancellations rather than working actively on reducing them. Direct booking cancellation rates in these cases can exceed 30%.
Why do bookers cancel?
Getting to the heart of the problem is not simple, and attitudes to booking and customer commitment to booking have certainly changed online. On the whole, bookers cancel for one of three reasons: Of these reasons, hotels should be adopting strategic approaches to mitigating the first 2, which they can directly influence.
- They found a better deal in another hotel
- They found a better deal for your hotel elsewhere
- They have a genuine reason for not travelling
OTA practices influencing cancellations
OTAs promote competition based on price and are particularly useful for people looking for a location rather than a specific hotel. There’s nothing wrong with this, OTAs provide a vital service to hotels in furthering a hotel’s reach into markets it cannot normally or easily tap into.
However, OTAs are increasingly encouraging bookers to actually book multiple hotels in a destination well in advance and then make their final choice later, with no-penalty cancellations. These “casual” bookers are higher up the sales funnel and are not so sure of their plans. The planning phase is therefore morphing into a “just in case” booking phase with a knock-on impact on those ultimately delivering the service fulfilment – hotels.
Pressure-selling tactics such as “one room left at this price” and “booked 4 times in the last 24 hours” are also routinely used to create a sense of urgency further pushing people to book before they are ready. (Tellingly, the UK’s Competition and Markets Authority CMA has just recently clamped down on these practices as well as misleading discount claims. Offending OTAs have until September 1st to make changes). Figure 1 for example shows seven different pressure-selling tactics in use in a single hotel listing for a Dublin hotel, two of which emphasise the ease of cancelation.
The OTA of course doesn’t mind that you book many and cancel most, since they will still receive their fee for the one booking that is finally chosen. However all the hotels bar one that are provisionally booked in this “just in case” approach are now left with some real problems. It is possible, especially in high occupancy markets, that rooms being held for this “just in case” booker are now not available for sale to a genuine booker (direct or indirect), leading to real loss of business in the long term.
In today’s world therefore, there is a clear difference for hotels between receiving an OTA booking and actual intent to stay. Bookers are increasingly “just in case” bookers and your chance of them actually staying is only as good as all the other hotels the OTA customer has also booked. Follow on alerts from the OTA notifying the booker of price drops encourages them to cancel their original booking and rebook at the lower rate, and so the situation worsens.
Risk Free Reservations and Cancellation Parity
In an effort to push the early booking strategy Booking.com introduced Risk Free Reservations for hotels in 2018. Hotels that participate see their advance purchase rates effectively turned into free cancellation rates for bookers with Booking.com guaranteeing the hotel another guest or the price of the room in the event of a cancellation.
Customers see the same rate on Booking.com and the hotel website but with different conditions that favour booking on Booking.com. With free cancellations being offered, cancellations will again increase with more and more people being encouraged to book multiple hotels for the same date. Booking.com carry all cancellation risks as it usually results in a confirmed booking for another hotel on their platform.
However, cancellations of direct bookings on the hotel website will increase too as bookers cancel their direct booking in favour of the better free cancellation rate on Booking.com.
In our view as hotel partners encouraging higher-profit direct bookings for our client hotels, Booking.com’s Risk Free Reservations should be a clear NO for any hotelier who wants to grow their overall business. The only place a customer should ever be able to get the best deal should be “hotel direct”. What’s clear is that rate parity in itself is not enough to facilitate this. Cancellation Parity is becoming just as important as customers look for more booking flexibility. Imposing more restrictive cancellation policies on OTAs is just the starting point.
Watch those early bookers
From our own data analysing hundreds of thousands of direct bookings we can see that the closer to arrival date the booking is made, the smaller the risk of cancellation and the further away the greater the risk of cancellation (see figure 2).
In fact, one third of all cancellations occur within a week of the arrival date, and half of these bookings are cancelled two days or less before arrival (see figure 3). Interestingly almost half of those who cancelled two days or less before arrival time had booked with a lead-in of more than one month. Watch those early bookers.
Given this direct booking data, what about OTA behaviour? The question here for hotels is: how much of your inventory is now tied up with “just in case” OTA bookers, many of which will go on to cancel, leaving you with a narrow window for sales recovery? How far out are your OTA bookers booking and how close to arrival are they cancelling? It is critical to have a handle on these figures in your business so that you can formulate an action plan.
Impact of Cancellations
In our experience, hoteliers often fail to calculate the true cost of cancellations when analysing their distribution per channel costs. Cancellation costs not only include the loss of revenue when it is not possible to resell that room for the same price but also:
(a) the operational costs of processing volumes of bookings that go on to be cancelled, and the operational costs of processing the cancellations themselves;
(b) additional distribution costs associated with sales efforts that become void, and
(c) the wasted initial cost of acquisition to include digital marketing spend and website costs for example in the case of a cancelled direct booking that resulted in a subsequent indirect OTA booking.
Even a compensated cancelled booking via Booking.com’s risk free reservations program brings costs in terms of an empty room that could be have been generating F&B income, or could have attracted a higher margin direct booker.
There is far more to a cancelled booking than the loss of the room itself and hotels need to be very mindful of the total cost per cancelation just as they need to be fully aware of cost per acquisition for successful bookings. Proper analysis is the starting point for risk mitigation.
Losing a direct booker to an OTA has long term implications
No hotelier wants to see a confirmed direct booking being switched to an OTA booking, but unfortunately it happens. But this situation is for the most part avoidable. An astute revenue manager or direct booking partner such as Bookassist will help to address any of the issues that may lead bookers to switch from direct booking to indirect booking.
You are already on the back foot when a direct booker cancels only to book instead via an OTA. They may have already concluded (perhaps correctly, but hopefully incorrectly!) that the OTA brings them better value so will be less inclined to go back to the hotel website if booking again.
Furthermore, the minute an OTA booker checks out of your hotel, the OTA sends them emails suggesting other locations or hotels, as well as offers. They own the customer, and unless your hotel has a robust process in place to capture and inform that customer before checkout then they will most likely be lost to the OTA if they decide to come back again. Why? Because there may be no reason for them not to go back to the OTA – unless you give them a reason.
OTAs build tight connections with their customers and so to compete effectively and be more resilient to cancellations hotels need to develop closer ties with their bookers well before arrival to ensure they are not tempted away by an OTA. You risk losing the life time value of a customer by losing them to an OTA, so it is key to push your direct booking benefits at every opportunity.
Know your data
Profitable hotels are the ones that know exactly where their customers come from, how far out they book and how many will end of cancelling. They also know why bookers cancel. Knowing why people cancel and when they cancel is essential in order to put in place effective cancellation, rate and overbooking policies. No two hotels are the same and cancellation trends can vary a lot across hotels. The key is to know your own data. If you don’t, you can’t even begin to address the issue.
Seizing opportunities – Guests who book on mobile devices tend to cancel less
According to Booking.com, guests who book on mobile devices tend to cancel less. With more and more bookings now being made on mobile a good user experience on mobile is therefore paramount. If your hotel fails to offer a fast feature-rich mobile experience, you may be raising barriers to getting the booking even though that booker may want to book direct.
Targeting mobile transactions is the single best thing that a hotel can do to improve its direct booking business and be prepared for the future. While desktop may drive more revenue now, traffic on mobile has now exceeded desktop traffic for hotels, giving you opportunity to capitalise on growing levels of mobile transactions. Alternatively, not addressing mobile is lost opportunity today, and increasingly into the future.
For example, Bookassist’s next generation V10 Mobile platform is an entirely new mobile-first booking platform delivering a truly engaging, super fast, touch-optimised mobile experience. It offers a full-feature app-like user experience that fully exploits the mobile opportunity for hotels right now, and positions them for the future. It has already proven to increase mobile conversion as well as average booking value for participating hotels.
Hotels should pay much more attention to cancellation rates and their subsequent effects. Rather than accept the issue of rising cancellations and only tactically adjust operations to cope with them, hotels need to focus more on why they happen and strategically adjust for long term business success.
Conversion rates for sales channels need to be considered alongside cancellation rates and not in isolation. Hotels that adopt a strong direct booking strategy and professional mobile presence experience a far lower rate of cancellations and therefore a far more profitable bottom line.
Part 2 of this article focuses on actual tactics that hotels can use to address the issue of cancellations in their hotel. Share your ideas and experiences and we will share them in our follow up article. Take survey
Claire Sawier is Head of Marketing, Bernhard Böhm is Product R&D Officer and Des O’Mahony is CEO and Founder at Bookassist, (bookassist.com), the multi-award-winning technology and digital strategy partner for hotels worldwide.