Revenue Generation Index: Understanding RGI in the hotel industry

A key performance indicator (KPI) in the hospitality industry, an RGI greater than 1.0 is considered to be outperforming its competitors in terms of revenue. In the bucket of external-facing KPIs, RGI is the biggie.

Inspired by the airline industry’s yield management practices, the metric was first popularized in the 1980s, when hotel chains began pursuing more data-driven revenue management strategies.

And nowadays in revenue management, data is everything.

Marriott Hotels was an early adopter of RGI and was credited in numerous case studies as helping the brand boost its hotel market share by accurately pricing rooms based on demand and competitor performance. 

Marriott's rise to the top has cemented RGI as an essential tool for modern hotel revenue managers. If you’re aiming for their level of success, mastering RGI is the first step.

But what is RGI? That’s the first of many questions we’ll address.

What is RGI?

Standing for ‘revenue generation index’, RGI is one of several KPI metrics used to compare your results with those of your compset. In this instance, it concerns your fair share of revenue.

Also known as the RevPAR index (RPI), it’s calculated by dividing your property’s revenue per available room by the average of your competitors, as supplied by a third-party vendor (often multiplied by 100 to avoid dealing in decimals).

The formula is as follows:  RGI = RevPAR / compset’s aggregate RevPAR

To give some context to the resulting RGI figure your hotel attains, use the following:

• RGI = 1.00, your hotel has its fair share of revenue

• RGI is > 1.00, your hotel is above its fair share

• RGI is < 1.00, your hotel is below its fair share

It’s a simple concept, but to stay competitive, it’s crucial to know what it is and how to drive it upwards

NB Take care not to confuse RGI with similar but different terms, such as market penetration index (MPI), which is calculated using hotel occupancy stats, and average rate index (ARI), which, as the name suggests, deals with competitors’ rates in relation to yours.

How to calculate RGI at your hotel

It’s a simple formula when expressed in a sentence, as it is above, and even simpler when using mathematical notation.

Let’s look at an example.

• Your hotel’s RevPAR for the past 12 months (or any period you choose) is $145

• The RevPARs of the 10 properties in your local compset for the same period, as sourced by a third-party data provider, are, respectively, $160, $142, $138, $155, $150, $143, $153, $144, $158 and $146

• Adding those figures together and dividing by 10 gives an average revenue per available room for your competitors of $148.90

• If RGI = your RevPAR / the average RevPAR of your compset

• Then your RGI = 0.97

But, as simple as the calculation might be, achieving a good RGI can take years to master and as with the example above, you may have your work cut out.

RGI is affected by a number of interconnected metrics, RevPAR itself being the most obvious one and, by extension, room rates and occupancy. 

These numbers fluctuate due to numerous factors, such as changes in demand and supply, your marketing efforts, and room pricing strategies. Additionally, how carefully you manage revenue with OTAs and other distributors impacts these metrics.

We’ll come on to improve these numbers but first, a quick look at what RGI reveals.

What RGI reveals about hotel performance and the competitive landscape

As we’ve already established, a healthy RGI is always above 1.0, signifying that your hotel is generating more RevPAR than its competitors.

Consistently maintaining or improving this metric shows that a property is competitive in both pricing and occupancy strategies.

By using RGI, you can fine-tune your revenue management strategies, identifying where you may be underperforming. You can then adjust your pricing, marketing or distribution tactics to capture more market share because that’s what this is all about: maximizing market share.

Tracking RGI over time enables you to stay responsive to market shifts and ensure your long-term success in a competitive landscape. Therefore, it’s worth reviewing it year-on-year, as well as for shorter periods of time, typically quarterly or monthly, to see whether you’re trending in the right direction.

It’s worth noting that it is possible to have too high an RGI if you achieve it through very high occupancy at the expense of RevPAR. If you underprice, you’ll dent your profits, which are, of course, the most important metric of any business.

4 Ways hoteliers can improve RGI

Improving your RGI goes hand-in-hand with improving your sales – for the right price. There’s a lot we could say about marketing strategy but in this section, we’ll focus on:

• What to offer to make your proposition more attractive

• Different routes to market

• Better ways to price your rooms

1. Offer additional amenities

When guests book a room, they aren’t just paying for a bed for the night. They’re paying for an experience and guest satisfaction. So, if you can offer value-adds that don’t impact too heavily on your bottom line, but both a) make your rooms more appealing and b) justify a slightly higher price, you’ll be on to a winner.

Examples that could increase your RevPAR and improve your RGI include:

• An airport shuttle or other transport from other hubs, or travel to and from tourist hotspots in your city

• Valet parking for those with their own transport

• Spa packages

• A welcome drink

• A round of golf

• Breakfast or breakfast add-ons

• Upselling through paid room upgrades – such as a sea view

• Early check-in and late check-out

2. Expand your distribution strategy

Your two basic routes to market can be summarized as:

• Direct bookings via your website (a.k.a. Brand.com) or over the phone or in person

• Allowing a third party to sell your rooms, either by buying up inventory at a wholesale price and selling it on, or advertising on their own site – usually an OTA – and selling on your behalf for a cut of the room’s price

The first route leads to a greater gross operating profit but less reach, while the other expands reach at the expense of profit.

This is the trade-off. Most hotels will operate a hybrid distribution strategy. The key question isn’t whether to work with OTAs, but which ones to choose and how much focus to give them.

Get it wrong and you’ll damage your RGI.

You need a robust OTA distribution strategy to improve and maintain RGI.

The key is to choose partners wisely, understand how fees work so you can negotiate effectively, work with OTAs’ marketing people, and get a handle on parity, the curse of third-party sales. 

Luckily there are tech solutions designed to help you do just that. 

Parity Insight serves as your central hub for monitoring, diagnosing, and managing parity issues across your hotel portfolio. If you’re managing one hotel, Rate Insight can seamlessly address parity issues.

It’s all about expanding and refining your distribution strategy, and ensuring that listings appear where travelers are most likely to see them and act.

3. Monitor and adjust your room pricing 

An effective, data-driven pricing and promotional strategy can help improve RGI by maximizing revenue.

With real-time intelligence on competitor pricing in your market - along with data on market trends, events, holidays, occupancy and online reputation - you have the power to make smarter room-rate decisions that will inform a dynamic pricing strategy at your hotel. 

Dynamic pricing means room rates aren’t fixed but are adjusted based on market demand, competition, time of booking, customer behavior, and other factors that can influence booking patterns.

It’s simply not feasible to collect, collate and analyze your data to deliver effective dynamic pricing before the data is outdated.

Rate Insight allows you to see your competitors’ current, past and future rates with the most real-time data available anywhere - all in multiple, user-friendly dashboards (including short-term rental data). You can quickly align or adjust your pricing to maximize revenue. 

4. Benchmark RGI with the right software

Competitive benchmarking shows how you are performing against your competitive set or within your market. The success of your benchmarking hinges on possessing the right data - if the data you are using is comprehensive, reliable and accurate, you are off to a good start.

To get a picture of how your RGI is tracking against your competitors, you need to consistently collect and analyze data from your competitors.

Traditionally, getting the right data in a timely, usable format has been the toughest barrier to effective benchmarking. Either the data is outdated, unreliable, or it lacks key elements that then undermine your strategic decisions. 

Save yourself the headache of hours of manual collection, sorting and analysis with a benchmarking tool that brings your KPIs together into a single dashboard and refreshes your data automatically so that you constantly have the freshest data to work with. 

Having a benchmarking tool in place with an intuitive user interface means you can continually monitor your RGI against the benchmark with ease. This helps you understand where you are situated within the competitive landscape. 

This will help you find opportunities for immediate action and monitor your position over time to see how your actions are impacting short and long-term performance.

In today’s tech-driven world, a benchmarking tool that provides lightning-fast insights with an easy-to-operate interface is a must-have to get the edge on your competition. 

Improve hotel performance with a data-powered revenue strategy

While RGI is important, it’s only a single performance metric, one that must be viewed in the context of a comprehensive revenue management strategy. To drive optimal business performance, you'll need to make informed decisions on a range of KPIs that consider the entire commercial spectrum.

Other key KPIs to consider include:

• Market Penetration Index (MPI). The MPI shows how your occupancy percentage compares to your market, and if you’re capturing your fair share of demand. 

• Average Rate Index (ARI). Your ARI measures your ADR against your competitors.

By leveraging the industry's most diverse, reliable, and real-time data sets, Benchmark Insight provides unparalleled clarity in tracking RGI, MPI and ARI, among others. These insights empower you to make more informed strategic decisions, sharpening your competitive edge.

Implementing an effective revenue management strategy requires the best tools using the best data. Combining benchmarking with tech solutions like business intelligence, rate shopping and predictive demand insights offers a complete suite for you to optimize revenue and gain market share. This is where Lighthouse comes in. 

We also have a number of additional resources that crossover with this topic and outline ways of leveraging data in revenue management, including material on revenue metrics, a beginner’s guide to hotel market intelligence, a benchmarking workflow guide and a guide to mastering hotel data analytics.