Go moderate! How hotels' cancellation policies affect their financial performance

Abstract

Hotel cancellation policies have shifted considerably in recent years. This is mainly in response to growing rates of last-minute cancellations and no shows and the resulting negative impact on the hotel’s performance. This study explores how two key policy elements, the penalty and the cancellation window, are likely to benefit the hotel. That is, how the severity of the policies is likely to positively impact the hotel’s financial performance. We developed a mathematical model and used cancellation and performance information data from a random sample of over 500 U.S. hotels to examine the effectiveness of a range of cancellation policies. The empirical findings support the mathematical model’s prediction that moderate cancellation policies are likely to generate better financial performance levels, compared to more lenient or more stringent policies.