What does the term "return on investment (ROI)" measure?

The term "return on investment (ROI)" specifically measures the profitability of an investment by evaluating the gain or loss generated relative to the amount invested. It quantifies how effectively an investment has performed, allowing individuals or businesses to assess the financial returns compared to the costs involved. A high ROI indicates that the investment has yielded significant returns, while a low ROI may suggest that the investment was not as successful in generating profits.

While total sales revenue, market share increase, and the cost of acquiring new customers are important business metrics, they do not directly reflect the profitability or efficiency of an investment. Total sales revenue, for instance, looks at the money coming into a business without considering the costs associated with generating that revenue. Similarly, market share reflects a company's sales as a proportion of the total market, and while it is essential for competitive context, it does not assess financial returns. Additionally, customer acquisition costs provide insight into the expenses related to gaining new clients, but they do not indicate the returns those clients will generate. Hence, ROI remains a crucial metric focusing on profitability, enabling informed investment decisions.