E-Commerce Dictionary
Return on Investment (ROI)
Definition
A performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments.
Deep Dive
Return on Investment (ROI) is a comprehensive financial metric used to evaluate the efficiency and profitability of an investment. It measures the gain or loss generated relative to the initial cost, expressed as a percentage or ratio. Unlike ROAS, which focuses specifically on advertising, ROI is a broader measure applicable across any investment, from marketing campaigns and technology upgrades to property acquisitions or new product development. Its fundamental calculation is ((Gain from Investment - Cost of Investment) / Cost of Investment).
Examples & Use Cases
- 1A company invests $10,000 in new software that saves $3,000 in operational costs annually, achieving a 30% ROI in the first year.
- 2A real estate investor purchases a property for $200,000, spends $50,000 on renovations, and sells it for $325,000, resulting in a 30% ROI (($325,000 - $250,000) / $250,000).
Related Terms
ProfitabilityCost-Benefit AnalysisNet Present Value (NPV)