Overbookings: A real cost breakdown

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Let's be real: you're paying a lot for overbookings; maybe more than you think. Sometimes overbookings are inevitable (bad luck: you had a water leak in a room), but most of the time they are preventable. Before we go much further though, let's see how much you're actually paying for an overbooking.

Breakdown of overbooking costs

At a high level, overbooking costs fall into 5 buckets:

  1. Cost of relocating guest(s)
  2. Compensation to guest(s)
  3. Cost of a (probably, although not necessarily) negative review
  4. Intangible cost of "ill will"
  5. Psychological tax on you and your team

Before we dive in, most of you will be from all over the world - currencies will differ, rates will differ, but you should still be able to get a rough idea. I'll be using US Dollars as the currency and will be using rough global average rates. Your mileage may vary, but you should still be able to follow the general idea and come up with your own numbers / values.

Also, very important: the costs I outline below are per unit oversold. What that means is that if you oversell a 3 person dorm booking (even by 1 bed; the other 2 people aren't going to stick around), you'll be multiplying the below numbers by 3X.

Now that that's out of the way, let's jump in:

1. Relocation costs: $22-55

When you overbook, it's your responsibility to get that guest a new place to stay that's at least as good as the room they had booked at your hostel - this can be a huge pain if it's high season or a special date. Let's break down further what it takes to relocate a guest:

- Room at another hostel (probably an upgrade)

You're going to be paying for something much more expensive than what you sold because it's last minute and there's not much available. If a dorm was booked ($25 average rate), let's say $12 more than your rate. If it's a private ($80 average rate) that was booked, then let's say $40 more than your rate.

In general, let's plan for paying 50% more than our rate. Why? Because it's always easier to plan for a worst case scenario.

Pro Tip: You may want to make an "alliance" with a few other hostels for these situations, so you always have a back up plan.

- Taxi to other hostel

You also need to get the guest to the other hostel - let's say $10-15.

2. Compensation: $25

Aside from getting them a room at another hostel, you definitely want to consider compensating them in some way for the inconvenience. You may have screwed up a much anticipated vacation, or long saved for trip.

Consider giving them a free dinner, lunch or an extra night stay for free at your hostel, or a voucher for a future trip. Let's say at least $25 (a meal for two).

3. Negative review and rankings

Everyone knows: negative reviews drop your ranking. But how much does that impact your sales? This one is hard to put a dollar value on. If you handle the situation well enough and you really go out of your way to help the guest, you may end up turning the negative situation into a positive, but it's really hard...

Negative reviews have an exponential effect too. Think about it this way: 1 bad review regarding an overbooking is bad, but could be seen as a one time incident. 2 bad reviews starts to be suspicious. Anything more than 3 bad reviews from overbookings is a pattern that is hard to break - the guest is thinking "OK, I'm definitely not booking here because I'm going to get overbooked" and you're going to get 90% less business because of it.

You've probably heard the saying:

It takes 20 good reviews to balance out 1 bad review.

4. Intangible cost of "ill will": $100-infinity

Guess what? People are much more likely to talk about (and actively spread) stories about bad experiences than good ones. Think about it: if you went to a restaurant and got food poisoning, you would go around telling everyone you saw about it. Not the best marketing in the world for that restaurant (or your hostel's brand if that's you taking the heat)...

People get really upset in these situations, and rightfully so - it sucks! They made a promise: that they would hold on to money to pay you for that room, a promise they kept; and you made a promise: that you would hold a bed for them, but you didn't.

Let's say the potential cost of the "ill will" and bad word of mouth is $100.

Pro Tip: If you handle the situation well, you could argue that you wouldn't lose anything here, but you're in a tough situation.

Don't believe me that ill will can cost your business a lot of damage? Watch the video below (with more than 17M views) by a musician whose guitar was broken by United Airlines.

"United Breaks Guitars" by Sons of Maxwell: (read more about it here: A Public Relations Disaster)

5. Psychological tax on you and your team

Let's be honest, this situation isn't fun for you or your team. Whoever happens to be at the front desk when the guest arrives is probably gonna get an earful, and it's probably not even their fault...

These situations can be very stressful and taxing on everyone involved. It brings down morale, and can lead to higher staff rotation. Receptionists that live through one too many overbookings will quit and you'll be left searching for and training new receptionists. The ones that don't quit will become numb to overbookings (I've seen this firsthand at a hostel) and will not show very much care for the guest, which will anger the guest even more and increase that intangible cost of "ill will" and your bad reputation.

It's hard to put a price on this, but let's say that every ten overbookings, one receptionist leaves. How much does it cost you to search for and train a new receptionist? Divide that value by ten and you have your cost for this item.

TLDR: $152-infinity

As a rough estimate, it will cost you at least $152 (per unit oversold), but it could cost a whole lot more. Remember, you need to account for out of pocket expenses ($52 per unit oversold): 1) relocation costs, 2) compensation, and other intangible costs (at least $100): 3) negative reviews, 4) cost of "ill will", and 5) psychological tax on your team.

Agree or disagree? I'd love to hear about it in the comments. :)

photo credit: Denis Dervisevic Angry Birds (license)