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Shifting Cancellation Policies Creates Revenue Management Issues

As expected, once Marriott International implemented new guidelines that in general require guests to cancel reservations 48 hours in advance of arrival, other mega brand companies are making similar moves.

The shift, now enacted by both Marriott and Hilton, presents new challenges as well as opportunities for all revenue managers.

Extending cancellation policies is the latest in an ongoing trend by hotel companies to tighten their grip on consumers’ booking habits. Until 2015, most chains and properties allowed penalty-free cancellations until 6 p.m. the day of check-in. Then, most chains changed to a 24-hour penalty-free window. Now, Marriott and Hilton might be the leading edge of an industry-wide shift in cancellation policies.

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As least initially, revenue managers in the two systems will enjoy an advantage over competitors since they’ll know what rooms they need to fill two days out instead of one day or even less time. This gives them a little breathing room to determine which avenues to pursue to fill last-minute rooms at the highest possible rates and lower possible costs of acquisition. That competitive advantage will melt, however, if other mega chains follow suit with 48-hour policies.

The initial reaction to Marriott’s announcement by the consumer travel media was swift and harsh. The new policy probably has the biggest impact on business travelers, who often at the last minute need to make changes to their plans. That criticism is a little disingenuous as it highlights one of the primary, if unstated, reasons hotels are shifting to a 48-hour cancellation window.

As all hotel operators know, it’s a common practice among some savvy travelers to book rooms at multiple hotels for the same trip, then cancel at the last minute the reservation(s) they don’t need. Becoming even more common by consumers is the practice of booking discounted rooms on last-minute OTA sites and then canceling the original reservation or reservations. In 2016, Duetto observed a sample of more than 1,000 hotel and casino properties using GameChanger and recorded an average of about 16 canceled rooms per day between January and July. The trend was alarming: In May, hotels in the sample saw an average of 17.4 cancellations per night; in June, that number rose 9.8% to 19.1 cancellations; and in July, the average number of canceled rooms per hotel per night jumped 13.6% to 21.7.

The book-then-cancel arbitrage creates havoc for hotel revenue managers and robs properties of revenues. Tightening the cancellation policy makes this kind of practice harder to implement.

For revenue managers operating under a 48-hour cancellation policy, the barrier helps them combat third-party shopping sites that alert users to changing hotel rates. Most of these sites, such as TripBam and Yapta, stop tracking rates two days before check-in, thus reducing the number of guests able to easily cancel/rebook at reduced rates.

Even 48 hours might not be enough notice to fill those last-minute rooms without slashing rate. But it depends on how you respond, and we recently published some best practices for this exact scenario. Duetto CEO Patrick Bosworth says the real opportunity for hotels is to offer more competitive room rates to guests who agree to make a nonrefundable, prepaid booking.

This fall, cancellation policies are sure to be a testy topic of discussion during corporate rate negotiations, particularly for Marriott and Hilton properties, but also for other chains and individual properties. Corporate travel managers with lots of clout, i.e., those who can deliver massive amounts of room nights, will undoubtedly press hard for more-lenient cancellation clauses for their travelers. And some analysts have suggested corporate travel managers will work directly with their key individual hotels to negotiate separate agreements.

And while waiving this kind of term might seem less expensive for a chain or hotel than giving on rate, it brings its own set of issues. It can create logistical and technology issues for both hotel revenue management and reservations systems to keep track of all possible exceptions to these new rules.

Finally, it will be interesting to see if Marriott and Hilton use cancellation leniency as an added benefit in loyalty programs. Again, it’s a low-cost benefit, but it’s also mostly rewarding those travelers—high-volume road warriors—who are also most likely to employ the book/last-minute cancel/rebook hack to secure the lowest rates possible.

This shift in chain attitudes toward cancellations need not be a major concern for revenue managers; however, it behooves everyone in hotel marketing and operations to keep abreast of their company’s current policies and the policies of competitors in order to devise strategies that favor your hotel.

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