The Business of Free Cancellation in Hotel Bookings

Joseph Galea asks who truly benefits from the practice. Is it travellers, hotels, or the middle-man?

Free cancellation sounds like a win-win, providing flexibility for guests and incremental bookings for hotels. However, at least for the hotel, it is a delicate balancing act, as behind each booking offer lies a complex strategy of pricing, planning, conditions, and ultimately profitability.

The option of cancellation continues to gain traction, but in reality, who truly benefits from it: travellers, hotels, or the platforms that sit between them?

At face value, free cancellation primarily benefits travellers by providing flexibility, peace of mind, and risk-free planning. For travellers, the option of free cancellation is no longer seen simply as a perk; it is now more akin to risk management. It allows freedom, adaptability, and a sense of security, and can even justify paying a slightly higher price for the comfort of flexibility.

However, the free cancellation option also benefits hotels by acting as a competitive tool to increase booking volume and gain early visibility into expected demand levels, even if it introduces certain operational risks.

For several years, hotels have offered free cancellation on bookings, a concept that was predominantly introduced by online travel agents (OTAs) as part of a strategy to disrupt the market. This practice became more prevalent during the pandemic, when few travellers were willing to commit to hotel bookings amid a highly fluid and unpredictable situation beyond anyone’s control.

It remains a booking option that is still in demand, even three years after the end of the pandemic. While this policy is clearly positive for larger hotels with big inventories, the benefits for smaller properties are not always as clear.

It is well established that free cancellation increases bookings and improves conversion rates. The awareness of flexibility reduces the psychological barrier travellers face when committing, especially business guests who often have uncertain schedules. When travellers compare similar properties online, flexible booking terms frequently become the deciding factor. As a result, hotels can attract and secure demand earlier, improving forward occupancy visibility.

Flexible bookings also support revenue optimisation. Refundable rates are typically priced higher than non-refundable ones, representing the premium guests willingly pay for flexibility and peace of mind. Free cancellation policies allow hotels to appeal to customers with different risk profiles while protecting the average daily rate (ADR). In periods of strong demand, cancelled rooms can often be resold at higher last-minute prices, generating incremental yield.

Free cancellation policies also tend to improve a hotel’s competitiveness on online travel agencies (OTAs). Many OTAs prioritise flexible listings in search rankings because they convert better. Offering free cancellation can therefore improve visibility and drive booking volume. It is also a clear and positive message, and a major sales proposition of Booking.com: “With free cancellation, you can stay flexible. Book the perfect stay with peace of mind.”

In addition, free cancellation provides valuable demand intelligence. Early bookings, even if some are later cancelled, give revenue managers insight into upcoming demand levels and market behaviour. This data supports dynamic pricing strategies and helps maximise revenue.

Although free cancellation was initially introduced by OTAs, hoteliers can now turn the strategy to their advantage by using flexibility strategically to encourage direct bookings. By offering slightly better cancellation terms on their own websites than on OTAs, properties can shift demand away from commission-heavy channels toward direct channels.

However, free cancellation is not entirely the winning tool it may initially appear to be. The primary risk hoteliers must manage is volatility. Free cancellation encourages “speculative” bookings, where guests reserve multiple hotels and decide later, and many of us have likely been guilty of this at some point. This practice naturally inflates apparent demand and distorts forecasting. High last-minute cancellation rates can leave rooms empty if demand softens unexpectedly.

Revenue instability is another concern. If cancellations occur close to arrival, hotels may be forced to discount aggressively to fill rooms, particularly if demand has slowed. Operational planning also becomes more complex: staffing and service levels are harder to manage when occupancy is uncertain.

As guests increasingly favour flexible booking conditions, there is a risk of eroding rate and booking discipline. As flexible policies become standard across markets and distribution channels, guests may resist stricter terms, reducing hotels’ ability, in the medium to long term, to charge premiums for non-refundable rates.

While free cancellation is becoming an industry standard, boutique hotels with smaller inventories may find it more difficult to manage and may consequently appear less competitive compared to larger hotels with extensive room counts. For smaller properties, free cancellation works best when risk windows are limited and pricing is carefully managed, rather than offering unlimited flexibility. Hotels can offer flexibility at the booking stage while setting a clear cut-off date for cancellations to avoid last-minute exposure.

They can also adopt practices long used by airlines and, based on a clear understanding of demand and historical cancellation data, allow for a conservative margin of overbooking. Airlines have overbooked for decades, and hotels can do so as well — cautiously. As cancellations become more predictable, a small overbooking buffer can protect revenue, provided there are agreements in place with nearby hotels in case guests need to be relocated.

These practices are not limited to boutique properties; larger hotels can also use them to manage free cancellation and protect against revenue losses. In fact, any hotel can mitigate the risks of free cancellation by strategically managing rates, timing, and guest behaviour. Many hotels today offer tiered pricing, with higher flexible rates that include free cancellation and lower non-refundable rates to secure guaranteed revenue.

Cancellation windows limit how close to arrival guests can cancel, allowing time to resell rooms. Free cancellation should not necessarily be offered up to the arrival date in all periods of the year. Offering flexible rebooking options instead of outright cancellations may also help reduce financial loss. Data-driven analysis of booking patterns helps anticipate cancellation levels, and any planned overbooking margin must be based on historical data as well as upcoming events and holiday periods.

Sam Walton, founder of Walmart, is credited with saying, “There is only one boss. The customer.” As long as travellers favour flexible booking conditions and free cancellation options, hotels must find ways to manage them effectively. Although flexible booking policies and free cancellation were initially imposed on hotels, many have since realised that, when managed strategically, they can enhance conversion and pricing power. Managed poorly, however, they increase risks through unpredictability and revenue exposure.