How to uncomplicate charging a cancellation fee

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Many business owners in the service industry that rely on customer appointments will relate to the frustration of a late cancellation or no-show. Dedicating resources and time to securing a customer, and turning away other clients, only to have them change their mind at the last minute can not only be frustrating, but even damaging to small businesses. Cancellation fees can protect your business from facing this situation, but it’s important to understand how to correctly implement them. Read on to find out how you can effectively use cancellation fees to protect yourself and your business.

What are cancellation fees?

Booking an appointment secures a time slot and prevents another client from acquiring that time. A cancellation fee is a sum of money that a business can charge when a customer fails to show up to their appointment. This provides businesses with a safety net to compensate for a portion of revenue that would otherwise have been lost. 

Cancellation fees can be charged by businesses that provide services requiring an appointment. This protects businesses such as hotels, beauty clinics, restaurants, and cleaning services. Subscription-based businesses with a lock in contract can also implement a cancellation fee for clients who wish to cancel before the minimum term set in the terms and conditions. This refers to gym memberships, software packages, phone plans, and streaming services.

How can I calculate cancellation fees?

Generally, an early cancellation can be rearranged to allow another client to replace their appointment. Early cancellation fees can still be valid; however, the fees should genuinely reflect the costs suffered as a result of the cancellations, otherwise it may be considered a penalty. Depending on your business model, up to 7 days’ notice is usually considered a reasonable cancellation and should incur a full refund, and the cancellation fee should only be imposed afterwards. This is up to each business to decide; however, the cancellation fee should be reasonable and align with the associated costs of the short notice. A reasonable cancellation cost can be calculated by identifying either your lost net profit or wasted costs.

Lost net profit is the amount that would have been earned during a service if the booking proceeded, minus costs incurred in performing the rest of the contract. For instance, cleaning fees after a hotel stay. Wasted costs refers to costs spent preparing for the appointment that cannot be recovered. For instance, if you run a mobile business and the client is not home when you show up.

When can cancellation fees be charged?

A cancellation fee is charged when a customer fails to fulfil their end of the agreement, either through a late cancellation, or failing to show up. Cancellation fees can be charged by either keeping a customer’s initial deposit or through a credit card charge. As the provider of a service, you can set the terms of the transaction that you want your client to agree to. It is important to clearly state these terms so that the client understands and agrees to your terms before entering into the transaction. This will also ensure that the customer does not have any legal clause if they try to claim back their money.

What happens if the cancellation is unavoidable?

It is important to note that charging a fee for cancellations caused by issues that are outside of the client’s control is unreasonable. This can be assessed on a case-by-case basis, but unavoidable events can be extreme weather conditions, hospitalisation, or the recent pandemic. In these situations where the client is not responsible for the cancellation, offering a voucher or rescheduling the appointment may be wise. 

Legal advice

Imposing a cancellation fee in your terms and conditions can protect your business from late cancellations. It is important to clearly communicate your business terms with your clients before agreeing to a transaction. Given the difficulties that can arise from both parties, your cancellation policy must be reasonable and account for unforeseen events. The fee you set in your terms should only account for the costs you would suffer due to the late cancellation.

If you require assistance with your cancellation policy or terms and conditions, you should seek legal advice. Our sister company, Legal Kitz can assist with ensuring that your matter is as time and cost efficient as possible. We provide a FREE 30-minute consultation to set you in the right legal direction. Click here to book a FREE consultation with one of our highly experienced solicitors today or contact us by calling 1300 988 954.