Course Cancellation question

Course cancellations are a thorn in everyone's side, but here they are especially challenging because we keep such small class sizes. As our clients are aware, we sometimes run sessions with as few as three people in them as part of our commitment to customer service. Small classes are great - students love them, instructors love them, and students get the best training they can get, but small classes are not feasible if we get short notice cancellations. With our cancellation policy, we have tried to discourage short notice cancellations by witholding an administration fee, or on very short notice, the entire fee, but what if they haven't paid? Should we change our policy to upfront payments only? Should we increase fees to offset cancellations? Other ideas? I welcome your thoughts on this one!
Cynthia