R and D (research and development) is a crucial function 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 for their startups and SMBs with a priority towards survival and growth.
The first hindrance to getting a meaningful answer to such inquiry is that many leaders still consider R&D prices as costs, rather than investments. Yet, indeed, research and development expenses are growth investments that can help you edge out your competition.
Hence, startup leaders should reorient themselves towards counting the potential profits, rather than the cost. This article shows you how to do so.
What is R&D?
R&D cost meaning describes activities businesses undertake to innovate and introduce new products and services. R&D cost definition is critical to the long-term survival of organizations, as it allows them to adapt to changing market conditions and maintain their competitive advantage. These activities can be undertaken internally by employees of a business, or they can be outsourced. R&D is typically focused on solving problems and answering questions that are central to the operations of the business.
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 and customers have many options. For companies that want to stay profitable, it is important to know what drives their profits.
Innovation is a key driver of competitive advantage. Research and development costs should be able to help companies to 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 company can improve its products, develop new products and create new markets for its products. It can also reduce the costs of manufacturing and marketing those products, which increases profit margins.
The answer to the question of what role R&D should play in a company’s strategy ultimately depends on the business goals of each individual company. Many companies rely on R&D for more than just product research. These companies may hire dedicated team or use their R&D departments for market research, strategic planning, or even sales and marketing assistance.
Companies are always researching new ways to improve their product line or develop a new product that consumers will buy. While many companies do have their own labs with private staff devoted to researching and developing new items, some companies hire outside researchers to conduct this work.
Among the significant research and development cost examples is when a company establishes a lab or department to perform research with the aim of creating something new or improving on existing products and services. These labs are often staffed by scientists, engineers, and other technical professionals who have advanced degrees in relevant fields. Here are some research and development costs examples:
- 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 2021, Google’s parent company, Alphabet expended over US$31 billion on R&D.
- Amazon invests heavily in R&D to promote innovation across a wide range of business activities, including 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&Ds often an ongoing process that’s used to promote growth and improve operations.
International Treatment of R&D
The comprehension of R&D costs in the international practise might be different from your country. So, let’s have a look on international standard approaches to understanding the research and development costs.
R&D costs: expenses or investments?
As we have identified, R&D costs should rightly be identified as investments towards the growth of the business, rather than expenses that make the business lose money. Successful businesses and corporations reach greater heights, innovate their product lines, and find opportunities to boost revenue through investments in R&D.
Research and Development (R&D) Tax Credit
The R&D Tax Credit, also known in 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 of investments, 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. Therefore, it is impossible to quote a specific sum without considering the peculiar objectives and goals of various companies.
R&D Costs Arrangements
Some companies have arrangements with other entities (such as universities) for conducting research projects and determining how to estimate R&D costs. In such cases, a portion of the costs associated with these projects is often paid for by the company that engages in R&D work.
There are some situations where it makes sense for a company to capitalize research and development expenses rather than deducting them from profits. Generally speaking, if a company is creating an asset through its R&D investments (like new technology), then it should be recorded as an asset rather than an expense.
Software R&D Expenditure
This type of spending includes all software-related R and D costs related to developing new products or enhancing existing ones. This is an especially important consideration for companies whose primary business is software 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 credit, for instance, although this depends on the tax laws of the country 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, and launching. Also, they must be able to work with the location and cost model, as the points are expanded below:
How much does R&D 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 for a long time a center for scientific research. The area is extremely fertile, and home to world-class universities. Estonia has already become a leading country in IT outsourcing, and it is only the beginning. With 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 is a notable name in corporate R&D examples as it is one of today’s most valuable tech companies. 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-centred solutions.
Software R&D Service from ProCoders for successful business up to date
To know how much does research and development cost 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.
Research and development allow a company to research new products or improve their current ones, which in turn can attract more customers and make those customers happier. A large portion of profits for many businesses is used for research and development, as this is an investment in the future rather than a cost, and it is important to keep up with the competition in order to maintain a strong market share. Profits from R&D may come in the form of sale augmentation, enhancing customer loyalty, adopting premium pricing for greater revenue, as well as innovation towards market leadership status.
R&D isn’t just about creating something from nothing—it’s about researching your market and finding ways to meet the needs of your customers better than anyone else. SMBs tend to have a lot more flexibility and adaptability when it comes to new products and services. If you’ve got a good idea that’s worth putting money into, you can do it without having to worry about the same level of red tape and bureaucracy that would bog down a larger company. SMBs win can be in niche products and services that are left in corporations’ blind zone. R-n-D is exactly about that: find this enhancement and implement it to customers’ journey in your business.
For startups, the key software R&D Services are quick prototyping, discovery phase to determine key features and how we can transfer our business value for our customers, MVP development, fast features development and testing market feedback, fixing bugs, implementing integrations and legal changes. Startups aim to find market fit, launch an MVP, and finally develop a viable product to gain the market. R&D can help startups accelerate 2 to 3 times faster in finding a market fit and increasing success chances.
Conclusion: Key Takeways
- 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.
- The huge billions of US dollars spent on R&D by enterprises such as Intel, Google, Amazon, and Apple might make it seem like the real benefits of R&D might be out of the reach of startups and SMBs.
- However, 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 cost? You can start by outsourcing. ProCoders has gained extensive experience working with various clients to 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.