Non-refundable rates: this is why they are useless

For some time now we have been taking a stand in trying to make hoteliers understand the pointlessness of non-refundable rates from a commercial perspective.

With a non-refundable rate, guests pay for the stay at the time the booking is made and, once payment is made, the amount is not refunded to the customer in the event of cancellation.

Presuming that non-refundable rates do not possess the characteristics to be appealing to customers, who are forced to pay in advance for their stay and lose everything if they cancel (in reality, they buy such rates solely on account of the lower price), they are conversely quite appealing to hoteliers who receive money in advance and need not worry about cancellations.

Cashing in during off-season periods is quite helpful because many businesses are on the verge of maxing out their line of credit and this breath of fresh air allows them to get through this period relatively unscathed. But if this is indeed the situation, taking payments in advance is not the solution to the problem: it is simply a temporary remedy.

Problems must be solved at the source if one really wants to solve them, finding palliatives is pointless. If anything, they can sometimes be a means to overcome a challenging time, but this should be a short and clearly defined period and this must not become a sales method.

I have no objection to a hotel offering non-refundable rates, for a month, to settle a critical situation of current account overdrafts. But when this becomes an actual marketing policy, then it is not a good thing, and I am perplexed when I hear that non-refundable rates sell well. I know that they sell, but only on account of the lower price, and not because they are non-refundable. And if this is so, (and so it is), managing a non-refundable room rate as a refundable sales rate, would have the logical consequence of selling even more.

Having non-refundable rates diminishes the real sales potential of the property. Just think about the fact that there may be customers who are not willing to be bound to the non-refundable restriction, and who may not necessarily be willing to pay slightly more to enjoy all the advantages of a standard rate for a reservation in the same hotel. These customers will definitely seek an alternative solution in a similar facility that does not require them to pre-pay.

Another aspect to consider is that, sometimes, paying 10 or 20 euros more per room for a single overnight stay is not such a big difference and many can probably absorb it. However, in the event of a longer stay, these 20 euros will easily become 60, 80, or even 100, at which point the difference becomes noticeable. Consequently, customers seeking long-term stays are penalized compared to those who book short-term stays, and this cannot be a sales advantage.

Non-refundable rates shorten the booking window because fewer customers are likely to accept the risk of booking a non-refundable rate so far in advance … better to wait until the last moment, when the risks of having to cancel a trip are somewhat lower. And we all know how hotel owners are negatively affected when their hotels end up having to cope with occupancy rates that only start moving up very close to stay date, not allowing for proper planning of the long-term situation. Wrong solutions are then implemented, with discounts and deals that further reduce earnings.

To summarize, if we compare two hotels that carefully monitor and adjust their sales rates daily, we will easily notice that the number of rooms sold by the hotel applying non-refundable rates is slightly lower compared to the one who does not. Yet, selling slightly fewer rooms also means raising prices somewhat less over time and, consequently, having slightly lower earnings by the end of the year. The lack of such revenues leads the hotel to rely on the current account overdraft during the off-season period, to repay which they are forced to resort to non-refundable rates, thus triggering a vicious circle.

I have not forgotten about the aspect pertaining to cancellations. The fact that customers are unable to cancel means that the hotel can depend upon a certain and non-hypothetical occupancy… quite true, but customers want to be able to cancel, they want to feel free to change their minds because they have found something that better suits their taste or their spending capacity. Depriving them of this freedom does not lead to an increase in revenue but rather to be perceived as a hotel that should be avoided, with too many complications and constraints. I would rather ask myself: how come that someone who has booked a hotel room, later on decides to cancel?

If the reasons are price-related, perhaps the sale rate was much too high and the customer noticed it, or perhaps the location was not the one that the customer desired, or perhaps the reviews were not that good, which brings us back to our previous topic: let’s find the source of the problem, eliminate the reasons why customers are not eager to stay at our hotel and things will improve. However, let’s also keep in mind that the booking process has changed, there is much more freedom now, and thinking of going back to the cancellation rates of 10 years ago is simply impossible. Today, guests book and cancel much more frequently, with quite a positive balance, if we do the things that customers like.

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