6 tips for Combating High Cancellation Rates on OTA Bookings

Today's hotel guests are empowered and informed, which in some ways is very positive. However, it has also led to a trend of guests making multiple bookings far in advance, before cancelling ones they decide against just a day or two before their stay dates. High cancellation rates on OTAs or other channels can be a problem for your hotel if you don't have a strategy ready to deal with them.

These high cancellation rates can lead to distorted demand levels for hotels, meaning non-optimal rates and lost revenue. Why does this happen, and what are a few quick tips for hotels looking to deal with the effects of these cancellation rates?

We've put together a quick guide to help you figure out the causes of higher cancellation rates, followed by some quick tips. Our goal is to help you figure out:

• Which channels cancellations are coming from
• What kind of cancellation rates you should expect
• How to plan for them and turn cancellations to your advantage

The first thing to realize is that your cancellation rates will be very different for each channel, whether that channel is your brand website, an OTA, over the phone, etc.

Where are cancellations coming from?

Average lead times tend to be longer on OTAs. This is because their message to the consumer is to book now, even if they're not sure. They encourage guests to reserve a room even when they're still in the 'looking' or 'dreaming' stages of the buying process, with the message that they can take advantage of cancellation policies later.

These messages are found explicitly on Booking.com's homepage, for example, and they're peppered throughout the booking process. They're far from alone – Expedia and other OTAs have similar messages:

Source: Net Affinity

Even if this is in reality the same policy your hotel has on its brand website (free cancellation, no booking fees), these messages have a natural result: long lead bookings through OTAs have a higher cancellation rate than short lead bookings and bookings from other channels.

Of course, these trends are going to be slightly different for every individual hotel. It's vital that you evaluate your hotel's own booking patterns – it may be that you get a much larger percentage of cancellations from Expedia instead of Booking.com, or that cancellation messages on your own site are creating a spike of cancellations on your direct bookings.

Evaluate your cancellation rates on each channel. When you know where your cancellations are coming from, you can start planning for them. If you're not sure about the source of cancellations, how will you know where to start? When it comes to cancellations, forewarned is forearmed.

What kind of cancellation rates should you expect?

Our own data is showing us cancellation rates of up to 60% on OTAs across all of our clients. A recent study from Mirai found an average of a 19% cancellation rate on a hotel's brand website, compared to a 39% cancellation rate on Booking.com and a 25% cancellation rate on Expedia over a four month period.

That equates to 104% more cancellations on Booking.com than on a hotel website, and Expedia's cancellation rate averages 31% more than the rate on the hotel website. These rates weren't divided on long lead vs short lead bookings, and it's good to keep in mind that bookings with long lead times likely had even higher cancellation rates.

— Source: Miraiespana blog

Why are cancellations higher on third party channels, and on OTAs in particular? One major reason is the culture of encouraging early bookings, illustrated above. OTAs are encouraging guests to book before they're even sure they'll travel.

One of the reasons their encouragement works is inspiration. OTAs spend millions on market research, advertising campaigns and marketing strategies to inspire people to travel.

These efforts are reflected on their website and in emails they send, and are extremely effective in encouraging booking – there's definitely room for hotels to take a few leaves from their playbook! However, this inspiration effect can also lead to casual bookings, especially if cancellation is free and guests don't pay in advance.

When a guest is booking on a hotel's own website, experience tells us that these guests are generally more committed to the stay: this is reflected in the lower cancellation rate. For example, cancellation rates on our clients own sites are significantly lower than the rates on OTAs, averaging at only 7%. For hotels taking deposits at the source, it's an average cancellation rate of 4%. These guests are more serious bookers, and more likely to follow through on the stay.

Even if you recapture a large number of your lost bookings closer to stay dates, it's likely that you're still losing money through cancellations (this all depends on your pricing strategy, of course). So what can you do to stay ahead of potential problems?

How can I plan for cancellations?

Unusually high cancellation rates have a few serious effects on your hotel's demand forecasting.

They can distort hotel demand levels by inflating them to an artificial high. They can also lead to the hotel filling too fast – what kinds of bookings have filled it? Will they cancel later?

In this case, when higher-quality demand starts within the usual decision-phase booking window (the time when the guest is no longer browsing or considering: they've made the decision to book), the rate may be too high for these guests or the hotel might appear to be fully booked when, in reality, cancellations from early bookers are just around the corner.

When an OTA pushes early bookings and creates the perfect set up for high cancellation rates, they're holding up your hotel's most valuable asset: its inventory.

How can hotels manage these bookings and deal with high cancellation rates?

Here are a few quick tips to deal with cancellations:

1. Pay attention to what channels are booking and when: monitor your lead times from each channel, online and offline, and figure out how many bookings you're getting through each channel
2. Focus on the cancellation rate on each channel: how many guests actually stayed, compared to those that were forecasted to stay? Keep a record! This will help you track cancellation rates over time and develop a plan of action
3. Consider more restrictive cancellation policies on channels with larger numbers of cancellations. This will need to be checked against your OTA contracts, but if you're able to reduce cancellations on certain channels with a more restrictive cancellation policy, you'll also be able to reduce uncertainty.

Of course, you want to avoid reducing the number of good bookings you get through these channels as well. To make sure a more restrictive policy doesn't affect this, run a trial for a few months before committing.

1. Use overbooking practices: Don't give away the house too early and then close it out – you'll likely be filling too fast, with bookings that are quite likely to be cancelled nearer to the date. Tracking the pace of cancellations by days prior to arrival enables you to determine how overbooked a given date in future should be. It's not enough to have a fixed total number of rooms you overbook by.
2. Reviews Allocation and Free-sale Bookings: If an OTA is operation on an allocation of rooms from you, are you topping this up too far in advance? Is the OTA selling the additional free-sale rooms and holding on to their allocation?
3. Analyse Forecasted versus Actual Demand: Long lead bookings are distorting actual demand levels. When you track your cancellation rates over time, you can predict how many of these are likely to become actual bookings, and adjust your demand levels from there. A forecast is never 100% accurate and will always have some variation from actual demand. The difference between the forecasted demand and actual demand is the Forecast Error – the goal is for the error to be as low as possible. If you're seeing a higher level of error, it may be attributable to the cancellations.

Conclusion

Take these tips, and have a serious look at your OTA cancellation rate. Cancellation rates that are too high can have a big effect on your revenue. There are techniques, like those outlined above, that you can use to control cancellation rates and recover from high cancellation rates. However, to take advantage of those you need to have a plan.

The more you're aware of where your cancellation rates are coming from, the more you'll be able to do to create a plan and stay in control! What techniques do you use to combat high cancellation rates?

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