How Much Research and Development Costs: A Guide by ProCoders

R and D (research and development) is crucial for enterprises and corporations. It gives new products and increases market leadership. However, many business leaders wonder how they can access affordable R&D solutions. This is especially important for startups and SMBs with a priority towards survival and growth.

The first thing to clarify here is that R&D aren’t costs, they are investments. This is a point that many business leaders miss.

Indeed, research and development expenses are growth investments that can help you edge out your competition.

So, some startup leaders should change their mindset, and the question of cutting costs, for example, won’t be so painful. 

In this article, we at ProCoders show you how to do so.

What is R&D?

R&D (Research and Development) is the process businesses use to create new products or improve existing ones. It helps companies solve problems and find better ways to work.

R&D is important for long-term success. It allows businesses to grow, adapt, and stay ahead of competitors. Companies can run R&D with their own employees, but many choose to outsource it. Working with outside experts can bring fresh ideas and speed up innovation.

R&D’s Role in Future Profits

Profits are the lifeblood of any organization. This is especially so in a free market, where competition is fierce. Customers have many options, so you always have to surprise them. Knowing what drives their profits is important for companies that want to stay profitable.

Innovation is usually a key driver of competitive advantage. Research and development costs can help companies bring innovative products to market ahead of their competitors and can thereby capture the bulk of profits before the competition responds.

The purpose of investing in R&D is to increase the company’s long-term profits. The business can:

• improve its existing products
• develop new ones
• create new markets for them

It can also reduce the costs of manufacturing and marketing, for example, e-commerce app development cost. This can increase profit margins.

What role R&D should play in a company’s strategy? This depends on the business goals of each individual company. Many rely on R&D for more than just product research. These companies hire dedicated team or use their R&D departments for:

• market research
• strategic R&D budget planning
• sales and marketing assistance

R&D Examples

Companies are constantly researching new ways to improve their product line or develop new products that consumers will buy. Many have their own labs with staff devoted to researching and developing new items. However, some companies hire outside researchers to conduct this work.

One of the major product development costs examples is setting up a lab or department to create new products or improve existing ones. These labs are run by scientists, engineers, and other experts with advanced degrees in their fields.

Here are some research and development examples to make sure you fully understand what it is and how it’s done:

• Intel invests heavily in R&D to create new ways of manufacturing chips efficiently. In 2021, the company spent over US$15 billion on research and development.
• Apple spends a lot on R&D for new products like the iPhone, iPad, Apple Watch, and Apple TV. According to reports, US$19 billion was allocated by Apple for R&D.

Google spends a lot on R&D, particularly for its search engine. In 2023, Google’s parent company, Alphabet, expended over US$45.4 billion on R&D.

• Amazon invests heavily in R&D to promote innovation across a wide range of business activities. This includes retail, cloud computing, digital media, and e-commerce services. Reports say Amazon spent almost US$42 billion on R&D in 2020.

The purpose of an R&D department is to push the boundaries of existing technology and create breakthroughs. R&D is often an ongoing process to promote growth and improve operations.

International Treatment of R&D

The comprehension of R&D costs in international practice might differ from that in your country. So, let’s look at international standard approaches to understanding these investments.

R&D costs: expenses or investments?

As we have identified, R&D costs should rightly be identified as investments. They impact the growth of your business, after all! They aren’t expenses that make businesses lose money. (If done right, of course.) Successful businesses innovate their product lines and find opportunities to boost revenue through R&D.

Research and Development Expense: Tax Credit

The R&D Tax Credit, also known in the USA as the Research and Experimentation (R&E) tax credit, is a federal benefit that provides companies dollar-for-dollar cash savings for performing activities related to the development, design, or improvement of products, processes, formulas, or software.

This credit provides much-needed cash to hire additional employees, increase R&D, expand facilities, and more. If in the US, you cannot determine what is research and development cost without this consideration. The credit was enacted in 1981 to stimulate innovation and encourage investment in development in the US. Since then, many states have also passed the R&D Tax Credit. As such, this benefit is available across a wide variety of industries.

There are several benefits to realizing the R&D tax credit. These benefits can include the following:

• Receive up to 12-16 cents of federal and state R&D tax credits for every qualified dollar
• Create a dollar-for-dollar reduction in your federal and state income tax liability
• Increase earnings-per-share
• Reduce your effective tax rate
• Improve cash flow
• Carry forward the credit up to 20 years
• Perform look-back studies to recognize unclaimed credits for open tax years (generally 3 or 4 years)
• Utilize the federal R&D tax credit against payroll tax (applicable to certain startup companies).

So if you want to invest in R&D and reduce costs at the same time, please check out the financial law in your country for more information about R&D tax credit cost.

How Much Does R&D Cost?

Research and development (R&D) activities are directed toward the creation or identification of new products or services. This is the point where you stop counting the costs and start counting the profits. So, when we turn our focus from costs to Return on R&D investment, we start moving to the business blue ocean, full of opportunities, blind niches, and new profits.

Indeed, the costs, including R&D expenses for IT staff augmentation services can vary according to various company needs (just like the cost to hire an app developer, for example). Therefore, it is impossible to quote a specific sum without considering the peculiar objectives and goals of various companies.

Research and Development Cost Examples: Arrangements

Some companies partner with universities or other organizations to conduct research. In these cases, the company funding the R&D often covers part of the project’s costs. This approach provides research for businesses and experiences for universities.

Capitalized Costs

Sometimes, a company benefits more by capitalizing R&D expenses instead of deducting them. If R&D leads to a new asset, like new technology, it is recorded as an asset rather than an expense. This approach spreads costs over time, matching expenses with future revenues. Capitalization can also improve financial statements by reducing immediate losses and showing higher profits in the short term. However, companies must follow accounting rules to determine which R&D costs qualify for capitalization.

Software R&D Expenditure

Research and development spending covers all software-related costs for creating or improving products. This is especially important for companies focused on software development, as R&D helps them stay competitive and bring new solutions to the market. These costs may include coding, testing, and refining software to meet user needs.

Reducing Cost of Research and Development: How to Save on R&D and Get More Profits?

Note that R&D costs may not yield profit immediately. They may do so after 1 or 3 years or even after 5 years. However, you can still gain regular benefits in terms of tax credits. (Although this depends on the country’s tax laws in which a business is resident.) 

In any case, to gain more profits from R&D a business must be as fast as possible with:

• research
• development
• testing
• launching

Also, they must be able to work with the location and cost model, as the points are expanded below:

Innovative R&D Cost Management – Nearshore R&D

How much does research cost? And how can SMEs reduce it? The high cost of R&D in in-house projects has caused the nearshore approach to become not only a cost-effective option but also a powerful tool for companies that seek to be agile, fast, and efficient in their R&D efforts. This approach is an increasingly attractive one for companies that want to advance their technology at a faster pace and realize greater R&D efficiencies.

Best practices from TOP giants

Estonia, which is located in the Central part of Europe, has been a center for scientific research for a long time. The area is home to world-class universities. 

Estonia has already become a leading country in IT outsourcing. It has a developed infrastructure, a highly qualified workforce, and low rates for office spaces.

Estonia has become a popular place for international companies to set up their R&D offices.

• Microsoft Development Center Estonia: Microsoft’s research office in Estonia is one of the company’s most ambitious and remote projects. The reason why Microsoft chose Estonia as the location for its R&D centers is the great talent pool of local engineers with experience working at other top IT companies.
• Twilio R & D Center Estonia was opened in 2015 in Tallinn, the capital of Estonia. The value proposition of the institute is quite simple. Twilio established the center to support its operations and help the company adapt to its fast-growing customer base.

Fujitsu Estonia: Fujitsu’s team in Tallinn is working on new features for the platform and testing them with users. Fujitsu’s goal is to expand its technology and service vision by creating people-centered solutions.

Software R&D Service from ProCoders for Successful Business

To know how much research and development costs in software development, perhaps the phase that ProCoders takes most seriously is the discovery phase. This is where adequate research must be conducted to determine the precise needs of the project and set appropriate plans. It has always been a guiding principle in all our projects, although two come to mind now.

When Roth River contacted us for IoT development, our in-depth research enabled us to determine the company’s exact problems and how to best design an app solution fit for the company and its customers. Because of this, our expert developers were able to cut development time by 25% by introducing new flexibility to the team.

Similarly, in building the fitness app Dryft, our team conducted detailed research to understand the scope of the work and determine the best tools and approaches to creating a solution. The discovery phase was 4 weeks of extensive surveys after assembling a vetted team in days. The result was accelerating time-to-market by 30% despite the complex requirements.

Conclusion: Key Takeaways

• Research and development expenses are growth investments that can help you edge out your competition.
• The purpose of an R&D department is to push the boundaries of existing technology and create breakthroughs.
• Enterprises like Intel, Google, Amazon, and Apple spend billions on R7D. This might make the real benefits of R&D seem to be out of the reach of startups and SMBs.
• Startups and SMBs can access similar benefits by offshoring R&D and adopting a reasonable cost model.

So, how can you improve your company’s R&D strategy and how to reduce R&D costs? You can start by outsourcing. ProCoders has gained experience working with clients from various industries. We helped supercharge their software development projects by elevating R&D through the discovery phase. To see how we can be of help, contact our stellar team today.