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Fully refundable cancellation policies see booking demand at almost the same levels as pre-pandemic

Andrew Martyn
Your.Rentals
A relative veteran of the short-term rentals industry (12 years and counting), Andrew grew up in Australia and has called Scandinavia home since 2000. He founded Your.Rentals in late 2016 and is CEO. His first MBA was from Melbourne Business School and his second he has earned over the past 20 years as an entrepreneur.
listings with fully refundable cancellation policies outperform listings with partial refunds
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Since the outbreak of COVID-19, the requirement for generous cancellation policies has increased dramatically. Guests are demanding flexibility regarding credit, cancellations, and refunds.

Many channels, OTAs, and rental hosts are pushing Free Cancellation (aka “Fully refundable”) policies for their vacation rental listings to increase bookings. Since guests don’t know if they’re going to be able to travel, the extra financial security offered by these listings is understandably appealing.

But what does this mean for those hosting the booking? Does offering Free Cancellation actually affect booking conversion, and if so, to what extent?

We’ve analyzed our booking data to discover whether Free Cancellation policies really do increase bookings if these bookings are different from others and what that all means for you as property managers and professional hosts.

About the data

Amongst other services, Your.Rentals offers software to over 30,000 vacation rental managers and hosts to enable them to publish their rental property listings on dozens of channels from one account. The majority of our customers are in the vacation rental sector rather than urban apartments.

The largest proportion of our property listings are located in Europe, although we also have a substantial number of listings in other regions, including Latin America and South-East Asia. We’ve compared booking patterns from before and during the COVID-19 outbreak to investigate what the increasing popularity of Free Cancellation policies means for the industry.

What are Free Cancellation Policies for Vacation Rentals?

First, a quick definition of “Free Cancellation.” We’re referring to a booking wherein a guest can receive all of their money back if they need to cancel within a given window, perhaps up until 7, 14, or 30 days before the check-in date. This is distinct from Extenuating Circumstances cancellations, which are almost always fully refundable because the cancellation is outside of the guest’s control.

Below are our cancellation policy options for our rental managers and hosts.

Fully refundable

  • Free30 (free cancellation up to 30 days before check-in, non-refundable less than 30 days before check-in)
  • Free14 (free cancellation up to 14 days before check-in, non-refundable less than 14 days before check-in)
  • Free7 (free cancellation up to 7 days before check-in, non-refundable less than 7 days before check-in)

Partially refundable

  • Super Strict (50% refund up to 60 days before check-in, non-refundable less than 60 days before check-in)
  • Strict (50% refund up to 30 days before check-in, non-refundable less than 30 days before check-in)
  • Moderate (50% refund up to 14 days before check-in, non-refundable less than 14 days before check-in)
  • Flexible (50% refund up to 7 days before check-in, non-refundable less than 7 days before check-in)

Properties with Free Cancellation receive more bookings

The main motivation behind offering Free Cancellations is to solve the uncertainty guests have about booking during the COVID period to help our customers receive more bookings. Does it work? Our data says yes – and it’s not even close.

  • Fully refundable booking volume surpasses partially refundable bookings
  • Booking conversion on average 4.2 times higher for fully refundable listings
  • Fully refundable listings performing at 92% of pre-COVID levels
  • Average booking value 65% higher for fully refundable bookings

Free Cancellation bookings outperforming all others in terms of volume

Your.Rentals introduced fully refundable booking options in June 2020. We’ve seen a steady increase in the proportion of bookings we’ve received for free cancellation properties ever since, and so far in 2021 Free Cancellation bookings have surpassed all of our other policies combined.

% of Bookings by Cancellation policy type 

% of vacation rental bookings by cancellation policy type

However, this doesn’t tell the whole story. Because this graph doesn’t consider the number of our properties that offer free cancellation, it’s hard to see the true difference in booking conversion.

% of Listings by cancellation policy type

% of vacation rental listings by cancellation policy type

When you consider the number of listings available per policy, the picture becomes more definitive. Listings with free cancellation policies still make up less than 30% of our overall portfolio but have been responsible for more than half of all bookings in 2021.

Booking conversion higher for fully refundable listings

When considering booking conversion, free cancellation policies have converted on average 4.2 times better than partially refundable since June. Our dataset compares the Booking Conversion Rate for the same period between two segments (a) properties with a fully refundable policy and (b) properties with a partially refundable policy. This 4.2 times higher booking conversion rate for properties with a fully refundable policy holds across all months in the analysis when viewed separately (regardless of the number of properties that we had in each segment) – and also contains a good cross-section of property types and destinations. 

This means that when we control the number of listings available on each policy, the true effect becomes clear. To put things into perspective, listings offering fully refundable policy cancellations saw booking demand at an average of 92% of the normal level over the past 5 months (i.e., what we’d expect without COVID). In contrast, those on Partially or Non Refundable policies saw demand at just 18% of the norm.

Booking conversion rate by Cancellation policy type

Booking conversion rate for vacation rentals by Cancellation policy type

Pattern forecast to continue

Bookings last year looked very different from normal. Throughout 2020, the booking window reduced dramatically, with the average time from booking to check-in reducing from over 100 days to less than 50. Other metrics like length of stay and booking value fluctuated greatly from what we’re used to seeing. 

With a brighter future seemingly on the horizon, in many ways, bookings are returning to a relatively “normal” pattern – apart from when it comes to cancellation policies. With guests increasingly opting to prioritize cancellation policies in their bookings, it looks like this supposed trend is here to stay.

Keep in mind how sales channels and online travel agencies (OTAs) display properties. Listings that receive bookings get boosted up the search result pages, and in turn, are more likely to receive more bookings in the future. As more providers start allowing (and then prioritizing) Free Cancellation listings, it will be more and more difficult for those with partially refundable policies to compete against fully refundable listings when it comes to guest appeal and visibility. 

Are bookings with Free Cancellation different from those without it?

One obvious question is whether bookings with Free cancellation policies are canceled at a higher rate than those without such policies. Because many channels and services (including Your.Rentals) only started offering Free Cancellation policies during 2020, it’s too early to accurately compare the cancellation rates of bookings with different policies in a truly meaningful manner. We’d recommend monitoring the situation for at least one full calendar year to take into account seasonality in different markets and control for the disrupting effect of COVID-19 on booking patterns.

With those caveats in mind, the limited data available suggests that whilst bookings made with Free Cancellation policies are canceled at a slightly higher rate than those without, it’s still well within what we’d consider acceptable limits. Our previous research showed much the same thing – more flexible policies do see a slight increase in cancellations, but the overall increase in bookings more than makes up for this. And there are other benefits too.

Fully refundable bookings have a significantly higher average booking value than partially refundable bookings, bringing around 65% more revenue per booking (over the past 4 months). Guests are often willing to pay a higher price for the security these policies offer, and those spending more money per booking are more sensitive to any financial risk. If you can’t offer this, you’ll likely have to compete on price and thus accept a lower revenue per booking.

Additionally, one option many channels and providers are starting to explore is to charge guests different rates depending on their preferred policy – for example, charging one rate for fully refundable bookings and a lower rate for partially refundable ones. It’ll be interesting to see how giving guests the freedom of choice will impact cancellation rates and overall revenue as these policies become more widespread 

Summary

We know that you are desperate to know what you can do to give yourself the edge at a time of great disruption. The short answer is that cancellation policy is absolutely key to booking conversion. Listings that allow guests to receive full refunds are approaching pre-pandemic levels of performance, something many of us didn’t think would be achievable for a long time yet. 

We believe that the performance-based ranking of listings in search results means that these listings will continue to perform strongly even with some degree of normality returning in other ways. It’s too early to say how these policies will impact cancellation rates and overall revenue. Still, the data we have so far suggests that the increased booking conversion will most likely offset any increases in cancellations.

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