If you do not define any cancellation fees it is much more likely that customers will change their mind last minute and cancel their booking.
If you define cancellation fees you will be able to generate incremental revenue in case that a customer cancels their booking. If you use an activity booking system which allows you to sell the same activity again you might even be able to collect both the cancellation fee as well as revenue for the new booking.
Imagine you have sold an authentic home cooking experience for a group of 10 people and already did the grocery shopping. If your customers cancel after you have shopped the groceries you would want to to be protected against the expenses which you already had for the groceries and the trip & time to the super market
Avoid strict cancellation fees, such as a 100 % cancellation penalty from the time of booking. This will hurt your conversion rate (the ratio of amount of people looking at your offer in relation to people actually booking it).
Rather let customers cancel free of charge if they cancel well in advance (e. g. at least 14 days prior to the activity) and then gradually increase the cancellation fee the closer the date of the activity (e. g. from 14 days to 7 days prior to the activity charge 20 %, from 6 days prior to 1 day prior to the activity charge 50 % and charge a 100 % cancellation fee for all bookings cancelled less than 24 hours prior to the activity).
Allow your customers to cancel the booking themselves via an online booking system for activities. Having to manage cancellations manually, calculating the refundable amount, etc. only adds to your operational overhead.
Imagine that you are offering a free of charge cancellation until 24 hours prior to the activity and charge 100 % cancellation fee thereafter. Your activity is in San Francisco, but your booking system provider is based in Australia. If the booking system by your provider in Australia is not timezone aware customers would already pay a 100 % cancellation fee for their activity when it is 24 hours until the start of the activity in Australia, which is 18 hours earlier than if the system was timezone aware and calculated the time correctly for San Francisco.