Many hotels do the right thing by offering better stock and price conditions to Booking.com, and of course to their own website, rather than to Expedia after seeing that they make more money that way, since the net price (after taking out the commissions) is almost always superior.
However, rarely are these same decisions made depending on cancellations and the costs that these generate per channel. It’s not easy to estimate or measure this cost since it doesn’t leave a direct trail (albeit an indirect one) on the average price or production of each channel, but we should not ignore it nevertheless.
We will analyse these costs as well as determine who is responsible for the fact that cancellations are shooting up: the hotel or the channel?
Do cancellations vary subject to the channel?
We have chosen 40 of our channels and analysed the cancellations (% on room nights) in the last four months (January-April 2016) of our three most important online channels: Booking.com, Expedia and the website itself. The results are as follow:
According to our analysis, the Booking.com cancellations are 104% more than the direct channel ones, while they are 31% up in the case of Expedia. The relation between Booking.com and Expedia is +56% in favour of the former.
It’s important to note that Expedia’s cancellation varies a lot subject to the model that hotels are using. The cancellation of the Package rate is very low, less than 3% (airline rates are mostly non-refundable); the Expedia Collect (Expedia charges the client) cancellation rate is around 12% and the Hotel Collect (pay directly at the hotel) cancellation rate is close to Booking.com levels at around 35%.
An example will help to better illustrate how distribution costs vary per channel if we take the opportunity cost into account had we not sold any of the rooms after the cancellations.
Let’s work with 100 room nights generated by each channel at a price of, let’s say, 150€. We then assign the resulting cancellation percentage from our analysis to each channel. We assume 85% recovery of these cancellations (an optimistic percentage), in other words, that the hotel manages to sell them through the same channel after the cancellation and that they can still maintain the sale price of 150€. After adding this opportunity cost, we see how the final commission of Booking.com would go up to 24.8% (increasing by 4 points), the Expedia one to 26% (increasing by 4 points) and lastly the website one (in which we assume 8%) which would go up to 11% (+3 points).
These numbers would vary in the different hotels. We invite you to make this calculation in your particular case and to start assigning cancellation costs to each channel in order to have a more complete picture of your distribution.
Why is Booking.com the channel with the most cancellations?
If the hotel applies the same cancellation restrictions to the three channels equally, why are the results so different? We believe that the reasons are as follow:
- Fraudulent bookings. The truth is that most of these bookings (like, for example, to obtain a visa to enter a country) go through Booking.com, since it’s the most popular and important OTA in the world. These are bookings that the hotel usually identifies as fraudulent and cancels on the spot, therefore with little impact.
- Payment method. Expedia generates many of its bookings in the Expedia Collect mode, where Expedia charges the client directly (not necessarily non-refundable). It has been psychologically proven that you pay in advance when you are sure that you will be going, and therefore have less of a chance of cancelling. Also, this payment method avoids any kind of fraudulent booking.
- Package rates. A high percentage of Expedia bookings (depends on the hotel) include a flight, which is usually a non-refundable rate. The cancellation of these bookings is, therefore, very low, thus considerably reducing Expedia’s cancellation average. It would seem fairer to compare Booking.com with Expedia in its mode of paying directly at the hotel, although unfortunately the data that hotels have is not always broken down in this way, thus making it very difficult to measure.
- OTAs work more on inspiration. The hotel doesn’t with its website. Mail marketing campaigns are commonplace to generate booking interest. Many clients end up doing so but, since it’s so casual, they book first and then see if they have time and money to actually go. In any case, cancellation is free. The inspiration phase is still far from the booking phase and therefore there is a higher probability that many bookings end up being cancelled.
- Culture of each channel. Booking.com is increasingly encouraging clients to book even if they’re not sure that they will travel. For that, it employs dozens of booking accelerators that pressure clients with a message such as “book now or you’ll lose the room”. Here is a message that it regularly sends to its clients:
This speculation suits Booking.com. Even if many rooms are cancelled, many won’t be. The hotel will most likely use Booking.com again to sell them, since it is the channel that best works with last-minute bookings.
Booking.com itself made a test some time ago where it notified the client when the hotel lowered its booking price (so that the client would cancel and make a new booking). This is an excellent service for the client but it was not received with open arms by the hotels, who themselves had an answer to it: make all rates non-refundable. In the end, Booking.com stopped this practice but it’s still active on www.tingo.com, www.triprebel.com and www.yapta.com
The traditional OTA discourse is that the final result is what matters and it ends up benefitting the hotel if it’s a positive one. Cancellations aren’t a problem. This statement is only partially true and supports itself on how hotels fail to calculate the impact of cancellations.
- The hotel-website client is different. Our experience tells us that this client is the most loyal client to the hotel and, therefore, speculates less. If he books at your hotel, he almost always goes (unless he has a setback).
The truth is that Booking.com knows that all of these cancellations are a problem for the hotel and they are working to reduce their impact. For that, they recently introduced two new tools to facilitate charging the bookings from their extranet and there seem to be movements to exempt the hotel of non-payments by clients, with Booking.com taking on that risk. The latter seems like a great move by Booking.com. We will await more details on the matter.
What to do to take into account the cancellations of each channel?
As we’ve seen, even if you apply the same distribution strategy and cancellation restrictions, each channel will have a different percentage and cancellation notice period. These cancellations are costing you money and you should look to assign them to each channel.
If we penalise Expedia for their large commission (closing sales or increasing prices), we should also do the same to other channels with a higher cancellation impact.
If Booking.com has the largest index of cancellations, you should consider applying a more restrictive cancellation policy in comparison with the rest of the channels, especially in comparison to your own website and particularly during high season. A holiday hotel, for example, would add a 21-day cancellation notice period for its hottest dates on Booking.com (or, directly, non-refundable) and would maintain 7 days on its website. An urban hotel, during dates of high demand, could do the same with 24 h. and 72 h.
The other tool the hotel has is the price. Increase the price on the channels with a higher cancellation rate. If you manage to monetize them in each channels (unsold rooms, average price reduction, staff costs, etc.), and bring it to a total cost, you should add it to the commission of each channel, which would give you a more complete picture of reality. The difference in cost between Booking.com and Expedia would be reduced and, on the other hand, would further increase between OTAs and your own website.
When we compare the costs per channel, we should broaden the analysis and have a global view. Direct commission is just one of the many costs that each channel has. Other ones that are also known, albeit rarely calculated properly, are the yearly/monthly fixed costs and the sales rebate. On the other hand, we rarely include the cancellation costs in this analysis.
If we were able to monetize it, we would realise that the channels that appear to be more profitable are not as profitable as we think. Once again, it continues to show that the direct channel is the most profitable one of them all and one that the hotel should strongly commit its long-term strategy to.
What was just a concern a few years then became a problem and now it has become a nightmare. We are referring to booking cancellations, which have increasingly grown to unsustainable levels, in some cases above 40% and 50%.
Some hoteliers have considered this normal and have adapted their daily operations and even their strategy to such levels of cancellations, even stating that it’s no trouble and that it doesn’t incur any extra cost. A surprising statement and one I could not disagree more with.
Why so many cancellations? Who is responsible?
There is no doubt that advances in technology make it increasingly easy and simple to book a hotel on the Internet. This factor encourages us to do it even when we are not sure that we are travelling, which results in many cancellations.
At the same time, there is growing pressure from OTAs for clients to finalise their booking, which once again generates new bookings that, in many cases, will end up being cancelled.
Lastly, the client has got used to booking “in case I go” or with the idea of carrying on looking: “I book a couple of hotels now but when the date arrives I will look for a better or cheaper one”. Once again, more cancellations.
Are OTAs to blame for so many cancellations?
Many hoteliers are furious and blame OTAs for this huge amount of cancellations, arguing the fact that “many bookings are cancelled a few days before check-in and this causes many problems”.
It’s obvious that OTAs have an impact on cancellations one way or another but let’s not forget that OTAs are just the tool and that it’s the hotel who sets the rules. The main reason behind so many cancellations is the passivity of the industry who, due to lack of time or not knowing how to deal with the problem, has been carried away assuming that these are the new rules of the game and that they must be accepted.
All OTAs allow you to create and apply different cancellation policies depending on dates and/or rates: “non-refundable”, “flexible up to 24 h.” and “up to 7 days before check-in” are just some of the examples. However, hotels tend to abuse flexible cancellations, even on the “hottest” dates. A few years ago, the main reason was the economic crisis (“I will take everything that is coming in because I need it”) and now it’s “if the competition is doing it, I cannot do the opposite”, which sounds a bit like “if everyone is jumping out of the window, so will I”.
Costs associated to cancellations
However, are so many cancellations bad? Do they affect our RevPAR or our GOP? Of course they do, and for many different reasons.
- Loss of income in the shape of unsold rooms (opportunity cost). An unsold room due to a cancellation (especially close to the check-in date) is something that you cannot afford, especially during high season. This impact, which is difficult to measure, is critical since it fully attacks your most important part of your income statement: the income itself.
- Special mention to the impact of no-shows. A no-show is just a cancellation with no notice. It’s the worst-case scenario since it leaves the room unsold for at least the first night. For the rest of the nights, you have very little room for manoeuvre. For urban destinations where average stays range from 1.5 to 3.5 nights, the problem is not as big when compared with holiday destinations (avg. stay 4 to 10 nights), where the problem is much bigger.
The no-show impact can be reduced by:
- Charging the client for the first night or the first two nights (assuming that it the charge doesn’t bounce, something which is not always the case).
- In hotels with high last-minute sales and walk-ins where you can find occupants for the rooms from the second night forth.
- Lower RevPAR when edged towards wrong revenue management. Seeing how bookings come in means you have to make decisions on the prices that, in the end, may be wrong. How many more rooms could you have sold if you had carried out a proper revenue management? It’s hard to estimate but there’s a high probability that it could’ve been many more. This affects both high and low seasons, which places a question mark on the statement that “cancellations aren’t a problem during low season”.
- Lower RevPAR when selling cheaper at the last minute. Cancellations just before check-in leave you with very little room for manoeuvre and, on many occasions, no alternative but to lower the price in order to sell the room, which then lowers your RevPAR.
- Higher distribution cost (or net RevPAR) when using OTAs too much for last-minute sales. It’s normal to lean on OTAs when you’ve had last-minute cancellations and you are trying to desperately sell the freed-up rooms. The problem is that you do so at a higher cost (channel cost, override, etc.), something which happens especially when they cancel a booking from your direct channel (the one with the lowest cost).
Some hotels see last-minute cancellations during high season as a “blessing” since they can then sell those rooms at a higher price. This may be true in some particular cases but a calculation should be made on how much extra production did you get compared to unsold rooms. Awaiting cancellations to increase the price is a huge gamble.
- Direct operating cost. For hotels that do not have an automatic download of bookings and cancellations, the time that a person takes making bookings which will then be cancelled is high. Time is money.
Cancellations aren’t the important part, here. The important part is the notice period of the cancellation
It’s better to have 70% of cancellations and knowing about them in good time than 20% of cancellations that are notified at the last minute. Booking.com purists will quite rightly argue that many cancellations penalise you in the ranking. However, let’s leave this point aside for now.
The notice period of a cancellation is therefore the important part and the one on which you have to work on and devise a strategy orientated towards putting the cancellations forward as much as possible in order to put the cancelled rooms back on sale and not end up with an unsold room. In this example, the cancellation has barely any impact because you have not yet increased the price and you have plenty of time to resell the room.
How to reduce the impact of cancellations on my hotel?
In order to minimise the impact, as well as knowing the hot dates of your hotel as well as the destination pickup, it’s important to abandon the concept that “non-refundable” implies discount. Let’s see why:
Some techniques to minimise the impact of cancellations are:
- Measure, measure and measure. If you want to deal with the problem of cancellations, first you need to understand the problem at hand. What percentage of cancellations do you have? How does it vary per channel? Per month? Per source market? Per room type? What is the notice period of the cancellation? Your PMS should be able to provide you with all of these details. If he can’t, you have a problem. You are trying to solve a problem which you don’t know of. At Mirai, we publish a detailed cancellation report in order to make our clients’ decision-making process a lot easier.
- Identifying false bookings. Bookings that you know are going to be cancelled but can do nothing but wait for that to happen are a big problem for many hotels. In these cases, you can charge and then refund 1€ for suspicious bookings the day it comes in and they will quickly come to light.
- Along the same lines, limit the number of nights on flexible rates to 4-5 (in urban destinations) and 7-8 (in holiday destinations), especially for OTAs. In these cases, leave just the non-refundable one available. In some countries, bookings of 15 or more nights are required in order to obtain a travel visa.
- Preventing cancellations. Another good idea is to communicate with the client who has booked stays of higher value and give him a good pre-stay service, which will then reduce his tendency to cancel the booking.
- Control the price on other channels. If you don’t control your distribution, your clients may find a better price for your hotel on an OTA with which you usually do not have a contract with. If this happens, the client will cancel the booking he had on your channel and book it again on another, where you will most likely have a lower margin of profit. Also, it will portray a bad image of the hotel to the client.
- Do not waive cancellations in your non-refundable rates. If your client gets used to cancelling non-refundable rates, that can be a problem. This practice can be done on your direct channel (to build loyalty) but never through an OTA (since it’s the OTA who then builds loyalty).
- Apply a revenue-management strategy that goes beyond the price. As occupation increases, as well as gradually increasing the price you should also make the cancellation policy more restrictive. Prepare your system with 24 h. notice, 2-3 days and even 7-14 days for holiday destinations. It won’t be a large obstacle for the sales and it will give you more room for manoeuvre in the event of a cancellation.
- For low and middle season dates, you can apply a strategy combining flexible rates with non-refundable ones (this time linked to a discount). This does not necessarily imply lowering your average price. We wrote a post dedicated to this matter here.
- For the hottest dates where demand exceeds your number of rooms, apply a non-refundable policy as the only one available, even if your competition does not do so. In this case, we would never apply the discount that we would normally associate to “non-refundable” but rather maintain the rate. It’s important to do so, even if there is not much time left for high season. Forget about leeway. If you are certain you are going to fill your hotel, don’t accept a single booking with a high probability of cancellation.
Your booking rhythm will slow down and this can be scary, which is why many hotels don’t do this. If it’s a hot date that you’ve always been full for, you won’t be wrong. In any case, you will fill the hotel up later than usual (the competition will already be full) but you will do so at a higher price.
Assuming a high level of cancellations is a dangerous game that can make you lose money and increasingly depend on intermediaries. Despite the fact that OTAs encourage the client to book (and cancel) with great ease, remember that the conditions of that sale are set by you. Is the objective to make money or fill the hotel as soon as possible?. Managing your distribution and controlling cancellations instead of them controlling you is in your hands.
Large Internet companies are evolving with a common objective: occupying the whole life cycle of the client, focusing especially on the most interesting and juiciest part from a money point of view, the booking or the hotel transaction.
Historically, the life cycle phases have been occupied by the giants of the industry with well-defined limits. However, today, all of this has changed.
There is strong competition to occupy each and every one of these stages. There are two main reasons:
- The cost of client acquisitions is too high to just let them go to the competition at the drop of a hat.
- The monetization of some stages (as inspiration or sharing) is very difficult and, on the other hand, in others (comparison or booking) it’s high and accepted by the hotel, who is used to paying out commissions.
The industry’s leading OTA has managed to build loyalty in many of its users by making them go directly to Booking.com to choose their hotel, book it and share their experience.
The only stage of the life cycle that Booking.com doesn’t cover is offering price-comparison between the different channels. Booking.com counteracts this weakness with a triple answer:
- An aggressive “best price guarantee” policy which has made an impression on clients, something strange because, in fact, Booking.com rarely has the best price (for that, you just have to check Trivago or TripAdvisor to verify it).
- A loyalty programme, Booking Genius, where registered users access a 10% discount, which is surprisingly covered by the hotel who, as well as reducing its income, it is also admitting that Booking.com has a better price than its own website.
- A long-term strategy. For many clients, the simplicity, security and guarantees that Booking.com offers is worth paying for that little bit extra. For them, the Booking.com brand is above the price in terms of importance.
TripAdvisor has recently completed a full transformation of its business model. With more than 320 million reviews, it’s one of the leaders in the “hotel search” stage. Its product, TripAdvisor TripConnect, strongly introduces it in the “price comparison” stage and, recently, TripAdvisor Instant Booking in the “booking” stage, which makes it a full-blown OTA. Who could have warned Expedia, back in 2011, that they were letting go what a few years later would become one of its main competitors?
Google, the last one to arrive and ready to break the mould
Google is the undisputed leader in the inspiration stage (who hasn’t searched for “holidays with children” or “weekend breaks” on it?), but also in the “search” stage (e.g., hotels in the Canary Islands). Not satisfied with this, it has now launched itself to occupy the whole customer life cycle by firmly entering the phases of comparison and booking.
Google Destinations has arrived
Its recent and big commitment to close the circle. Only available on mobile searches for now, Google has surprised us all with a unique tool in this industry that should have Booking.com and TripAdvisor quite worried. Its name? Google Destinations.
Its objective is no other than to channel the inspiration and search of everything related with travelling and destinations by naturally incorporating itself in Google search results.
Once inside, Google tries to trap the user by offering everything he/she needs: information, photos, reviews, prices and, eventually, bookings. If Google gives me everything I need, why look somewhere else?
Without doubt, Google will offer plenty to talk about with this new tool. It’s too soon to evaluate its impact but is seems quite obvious that it will be a success and that it will find its place among users.
Where does Google Destinations get the hotel rates? From its HPA platform, which gathers them from the different OTAs and from the direct-sales companies (at Mirai we have had integration since 2013). Up until now, Google redirects the user to the OTA or to the hotel itself to complete the booking but I fear that this won’t last long.
Book on Google, or booking a hotel directly on Google
If Google is already dominating inspiration, search and currently entering price-comparison, it only needs to “attack” hotel bookings to close the circle and complete the user’s life cycle.
With this objective, Google is already trying its booking system in the United States, where the user never leaves Google, making it an OTA, at least in the client’s eyes. This new model is known as Book on Google, but there are still many details that are yet to be disclosed. We will impatiently wait for more details.
Same ending but different origin. Trivago was born a few years ago and become the main hotel price-comparison tool. Just like TripAdvisor and Booking.com, Trivago has evolved by always putting the user at the centre of the strategy (its real client and not the hotel).
It doesn’t just want to be a price-comparison website but also a hotel searching tool. For that purpose, it has bombarded us with television adverts with its catchy slogan “Hotel? Trivago”. This turn of events can easily be seen by comparing its TV adverts: Here is the one from 2011 and here is the most recent one from 2015.
Trivago also has plans to enter the hotel booking phase. This system, still in its beta phase, is currently only available in certain markets like Germany.
Threats but also opportunities
All of these changes create further confusion in an industry that’s already complicated in itself. Not being up to date means that you won’t be able to react in time and, eventually, these changes will affect your hotel in one way or another.
However, these movements are not only threats but also opportunities for hotels to sell more at a lower cost. If you play your cards right and you are not afraid of intermediation, you will benefit from it.
The fact that Booking.com, the leading OTA, completes the customer’s life cycle and its number of “direct” clients is growing is the worst possible scenario for you. These users will be captive of Booking.com and if your hotel wishes to have access to them you will have to accept their rules (quota, commissions, etc.) from now on. What is the difference between being a hotel owner or Booking.com selling you 60% of it?
That TripAdvisor and Google are launching their own booking systems is also not good news, since it’s another wall created between client and hotel. However, when lacking direct inventory, it’s a chance for you to feed it to them. If you don’t, the OTAs will occupy this space and carry on selling what you could be selling yourself with your “direct channel”.
The same happens with loyalty programmes. Will it be the next step for TripAdvisor or Google? While they don’t have them, you still have the chance to build customer loyalty with the clients that they may bring to you.
The changes on the Internet are very quick. Intermediation has more money and knowledge, so it’s normal that they update before anyone else. Competing with them from a technological perspective is impossible.
So the sooner you accept that the better. This is not your war.
Remember, however, that there is something that will never change and that we often forget: the rooms are yours and not the OTA’s. Bearing this in mind, you can fight with these changes, bringing them always onto your turf and not onto the OTA’s.