I’m with Karin on this one.
Consider both your short term vs. long term revenue. According to your contract, you do have the right to keep their money. But if you do that, you may lose a client who is otherwise potentially in with you for the long haul. Maybe credit them towards the next series of small-group sessions.
I have made exceptions for extenuating circumstances (i.e. a client who broke her wrist in a group-ex class, I’ve extended her small-group sessions until she is cleared again for bodyweight exercise). I can do that since I max out my class size at 6 people but I can actually handle 8, so bumping a client into a future session doesn’t cost me revenue.
Before your next session starts, you might want to reconsider / rewrite your policy. You could say something like if someone has to cancel and there’s a wait list, they can transfer their sessions to someone on the wait list without penalty. If they have to cancel for a health or emergency reason, and they notify you XXX days in advance, they can credit XXX towards the next series.
While I think it is definitely important to have a cancellation policy in place, life happens–and I think it is important to make some allowances for clients and class participants. Perhaps you could allow the participant to make it up within a certain time frame. After that, they lose the session.
Sometimes you will have to deal with those who abuse a cancellation policy, but others have legitimate reasons for needing to cancel, so a firm but fair policy would be appropriate. Yes, you have a business to run, but if you show your loyalty to them, they may just be repeat clients for you and refer others.
cancellation policies are always tricky to stick to when there are legitimate reasons for the cancellation.
Is there a chance that you can fill the spot with another person? Did you have to turn away people because you were at capacity? Do you know this person? Is there a history of cancellations for flimsy reasons?
Since you had stated your policy clearly, you have all right to stick to it. But will this person ever come back for another session?
Knowing myself, I would probably give him or her a rain-check so that the amount paid can be applied to a future 4 week SGT.