How Your Airbnb Cancellation Policy Is Impacting Your Bottom Line

Most Airbnb hosts select a cancellation policy based on their own level of comfort and risk tolerance, not as a strategic part of overall revenue optimization. But just as other ancillary settings like minimum night stay are becoming actively managed, maybe there’s something more to choosing a cancellation policy.

Resort Market: Breckenridge, Colorado

Breckenridge is a quintessential ski resort destination tucked deep in the Rocky Mountains. Its close proximity to Denver means that although it only has 5,000 full-time residents, it’s a popular area for vacation homes. These vacation homes are often used as short-term rentals and help alleviate the heavy demand for lodging, especially during winter high season when weekend visitors can swell to 35,000.

Vacation Rental Performance

When it comes to analyzing performance of short-term vacation rentals in Breckenridge based on their cancellation policies, there’s a clear trend: Average Daily Rate (ADR) and Occupancy behave inversely as policies become more strict. Occupancy stays relatively consistent for listings with flexible, moderate, and strict cancellation policies, averaging between 57% and 61% during 2018.

Of the policy types that are openly available to hosts, listings with strict cancellation policies generate the highest Revenue Per Available Rental (RevPAR), $241.

Rental Demand

In Breckenridge, the overwhelming majority of available listings, 86%, have a strict or super strict cancellation policy. Airbnb extends a super strict cancellation policy in special circumstances by invitation, however, hosts may also request access to this policy directly from Airbnb.

Airbnb created the super strict category to attract hosts with vacation homes already on HomeAway to dual-list on Airbnb. Because HomeAway offers more stringent cancellation policies, Airbnb needed to extend its policy offerings to to create a consistent policy across platforms for property managers.

Property Size

Another way to help decide which cancellation policy is right is by analyzing the market based on size of listing. In this case, we’re looking at the number of bedrooms.

In Breckenridge, listings with a moderate cancellation policy tend to be smaller, with the largest listing having six bedrooms, and an overall median of three bedrooms. Rentals with a strict policy have the widest range in size (one to thirteen bedrooms) and a median of six bedrooms. Breckenridge is full of vacation rentals with at least eight bedrooms. These large properties are usually professionally managed, cater to a year-round, group travel audience, and typically have a strict or super strict cancellation policy.

Smaller rentals are more of a commodity that compete on settings like cancellation policy and minimum night stay, and are more likely to be booked last-minute. Therefore, flexible cancellation policies are less of a risk and more valuable as a differentiator for these properties.

Age of Listing

Similar to implementing a one-night minimum stay or lower-than-market daily rate, there is evidence that some new hosts in Breckenridge are leveraging a more flexible cancellation policy as a way to break into the market.

In the chart above, vacation rental listings that were created in 2018 have a higher percentage of flexible and moderate cancellation policies than those that were created a year or two ago.

This suggests that new listings may start off as flexible, but ultimately transition to a more strict policy either because they have garnered enough reviews and awareness, or because they have felt negative impacts from having too flexible a cancellation policy.

Resort Location Conclusion

New hosts with short-term rentals in seasonal resort destinations shouldn’t feel pressured to introduce a new rental with a flexible cancellation policy. Occupancy rates are so similar between flexible and moderate policies, which indicates guests aren’t highly favoring a flexible policy over a moderate policy. In fact, it’s probably safe for new listings with at least six bedrooms to enter the market with a strict policy.

Urban Market: Berlin, Germany

The 775-year-old European city of Berlin is rich in history and home to 3.6 million people. Berlin has a strong tourism and conference industry, which has generated a combined 31 million overnight stays annually since 2016. In 2018, 8% of total booked nights came from Airbnb. The city, however, has not been immune to challenges with how to live symbiotically with home sharing platforms.

A couple years ago, Berlin had some of the strictest rules on the books for hosts looking to leverage their homes as short-term rentals. While the intense regulations may have quelled massive growth, as experienced by other major European markets, Airbnb remains popular.

Vacation Rental Performance

Nearly a quarter of all Airbnb listings in Berlin have a strict cancellation policy. On average, these rentals earn a higher RevPAR, $94, than listings with other policies. Similar to Breckenridge, we see a trend of stricter cancellation policies as ADR increases. However, occupancy remains fairly unaffected, staying within a range of 75%-80%.

The data above suggest that hosts who feel they are losing revenue from cancellations may test a stricter policy without sacrificing occupancy, especially if transitioning from a flexible policy to a moderate policy.

Rental Demand

Unlike Breckenridge, 57% of all Airbnb listings in Berlin have a flexible or moderate cancellation policy.

This is likely due to the urban nature of the market, forcing many short-term rentals to actively compete with local hotels (which tend to have flexible-to-moderate cancellation rules). In fact, less than 1% of all listings in Berlin have a super strict cancellation policy.

Property Size

In Berlin, there is no major distinction of listing sizes based on cancellation policy.

The majority of listings with a flexible, moderate, or strict policy have one or two bedrooms. So far, ADR is the biggest indicator of which cancellation policy a listing has.

Age of Listing

Half of vacation rental listings that were introduced during 2018 had a flexible cancellation policy. Similar to Breckenridge, there is a shift toward more strict policies after listings have been on the market for at least a year. As listings age, the distribution of cancellation policies begins to smooth out.

In fact, there is a nearly even distribution among listings that are four years old (introduced in 2015). There are several factors potentially impacting this, such as the saturation of lodging options within the market forcing hosts to find creative ways to be competitive, or perhaps a low rate of cancellations (risk).

Urban Location Conclusion

Pay attention to ADR. Prospective budget-friendly guests might shy away from a strict cancellation policy, especially if there are a lot of other budget options with flexible or moderate policies.

However, don’t feel obligated to launch a higher-tier listing with a flexible cancellation policy. Many listings that start out with a flexible policy transition to a more strict one within their first year. This could be because they’ve received enough reviews to feel established, or because they realized they were losing revenue from cancellations. Either way, a flexible cancellation policy does not appear to be a popular, or common, long-term strategy for higher ADR listings in urban markets.

Get Cancellation Policy Data for your Market

Combining vacation rental data from more than 10 million listings in 80,000 markets, MarketMinder’s customizable dashboard enables vacation rental hosts, property managers, and real estate investors to predictively model property performance, optimize pricing, and find lucrative vacation rentals anywhere in the world.

MarketMinder visualizes over 25 short-term rental metrics, including real-time rate data. Log in or create an account to MarketMinder to see your market’s breakdown by cancellation policy.