A cancellation policy is the set of conditions, stated at the time of booking, that governs refunds and penalties if the guest cancels. Common options range from flexible (free cancellation until the day of arrival or 24 to 48 hours before) to strict (non-refundable, or penalties from 7 to 30 days out for groups and peak dates).
A clear policy protects both sides: the hotel has a basis to retain a deposit or charge a penalty, and the guest knows exactly what to expect.
In practice: attach the policy to the rate plan, not to the room, so you can offer a cheaper non-refundable rate next to a flexible one. On OTA bookings part of the rules depends on the platform; on direct bookings you are fully in control, so use that to make the direct offer more attractive.
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