Bringing a product or service to market — and finding lasting success with it — requires more than just a good idea. You also need a strong research and development (R&D) strategy to help refine your concept, test solutions, and stay ahead of your competition.
Here’s everything you need to know about R&D and why it’s well worth the investment.
What is research and development?
R&D refers to the various activities businesses conduct to prepare new products or services for the marketplace. Businesses of all sizes and sectors can participate in R&D activities, although the level of investment can vary. For example, technology and healthcare companies tend to have higher R&D expenses, as do enterprises with larger budgets.
Typically, R&D is not expected to yield immediate profits. Rather, it focuses on innovation and setting up a company for long-term profitability. During this process, businesses may secure patents, copyrights, and other intellectual property associated with their products and services.
At larger companies, R&D activities are often handled in-house by a designated R&D department. However, some smaller companies may opt to outsource R&D to a third-party research firm, a specialist, or an educational institution.
Types of research and development
R&D activities typically fall into one of three main categories:
- Basic research: Basic research, sometimes called fundamental research, aims to provide theoretical insight into specific problems or phenomena. For example, a company looking to develop a new toy for children might conduct basic research into child play development.
- Applied research: This type of research is practical and conducted with a specific goal in mind, most often discovering new solutions for existing problems. The children’s toy company from the previous example might conduct applied research into developing a toy that facilitates play development in a new or improved way.
- Development research: In development research, researchers focus exclusively on applied research to develop new products or improve existing ones. For example, a team of development researchers may test the hypothetical company’s new toy or implement feedback obtained from customers.
[Read more: How to Seek Funding for Your Invention]
Why invest in research and development?
While R&D can require a significant financial investment, it also yields several advantages. Below are four specific areas where your business can benefit by conducting R&D.
New products
R&D supports businesses in developing new offerings or improving existing ones based on market demand. By conducting research and applying the findings to their final product, companies are more likely to develop something that meets customers’ needs and performs well in the marketplace.
Efficiency
R&D can help businesses understand their place in the market and identify inefficiencies in their workflows. Insights from R&D activities can illuminate ways to improve operations as well as where to allocate resources most effectively, thereby increasing overall efficiency.
Cost reductions
While developing a well-researched product or service that performs well is likely to maximize profits, R&D aimed at improving internal processes and technologies can reduce the cost of bringing products and services to market.
Funding
Businesses that invest in R&D may be eligible for specific tax incentives to help offset the associated costs.
Small businesses have limited resources. They don’t have that endless budget that the Fortune 500 company has, which means the small business will have to get creative to conduct worthwhile R&D.Becca Hoeft, CEO and Founder of the Morris Hoeft Group
How to fund R&D efforts as a small business
Securing funding for R&D can be one of the biggest challenges for small businesses. Fortunately, there are a variety of options available, and many businesses combine multiple sources to support their innovation efforts while mitigating financial risk. Here are some of the most common ways to fund R&D.
Internal funding
Some small businesses self-fund R&D projects using retained earnings. This method offers business owners full control over how the funds are used, but it may limit the project scope, depending on the business’s available cash flow.
Government grants
Local, state, and federal governments offer grants and tax incentives to support R&D. The Small Business Innovation Research and the Small Business Technology Transfer programs are specifically designed for small businesses conducting R&D in the U.S.
University partnerships
Collaborating with academic institutions can provide businesses access to research labs, student talent, and faculty expertise, often at a lower cost than obtaining these resources in-house.
Venture capital
For high-growth startups, venture capital may be a viable path. Investors often look for strong R&D pipelines when considering funding opportunities.
Crowdfunding
Platforms like Kickstarter and GoFundMe offer alternative funding methods, especially for consumer-focused innovations with early market appeal.
Real-world examples of R&D in action
R&D takes different forms across industries, but the impact is often the same: better products, improved services, and long-term growth. Here are a few hypothetical scenarios where companies might use R&D to their advantage:
- A small skincare brand might use R&D to develop an all-natural moisturizer by testing ingredient combinations, analyzing shelf stability, and conducting user trials. These efforts can lead to the development of a new product line that meets the demand for clean beauty solutions.
- A tech startup could leverage R&D to improve the user experience for its mobile app. By gathering customer feedback, prototyping new features, and conducting usability tests, the business can help ensure its product remains competitive.
- A local plumbing company may explore new eco-friendly pipe materials or develop a proprietary diagnostic tool to speed up service times. These innovations, backed by research and testing, can help differentiate the business in a crowded market.
Ultimately, R&D isn’t solely for laboratories or large corporations. It’s a practical tool small businesses in any industry can use to solve problems, meet customer needs, and fuel innovation.
Tax credits and incentives for small businesses
A good place to start when looking for R&D incentives is the federal R&D tax credit, which offers a dollar-for-dollar reduction in tax liability for businesses that participate in various research-based activities. Eligible companies can apply for this credit by submitting Form 6765 with their business taxes.
To qualify, a business must engage in activities intended to improve or develop a product, process, technique, invention, or software. These activities must involve technical uncertainty and a method of experimentation, which typically requires trial and error or the evaluation of different solutions.
Even small businesses and startups may be eligible to apply a credit toward payroll taxes, making it especially valuable in early growth stages. Working with a qualified tax adviser can help determine eligibility, estimate the credit amount, and ensure all required documentation is accounted for.
Beyond the federal credit, many states also offer their own R&D tax incentives. These vary widely by location but typically follow similar qualification guidelines. Businesses conducting R&D should research their specific state’s programs to determine eligibility.
[Read more: How to Qualify for and Claim the R&D Tax Credit]
Overcoming the challenges of small business R&D
According to Becca Hoeft, CEO and Founder of Morris Hoeft Group, small businesses may face numerous challenges related to R&D that their larger counterparts might not experience.
“Small businesses have limited resources,” said Hoeft. “They don’t have that endless budget that the Fortune 500 company has, which means the small business will have to get creative to conduct worthwhile R&D.”
While R&D funding is available through various government grants, university programs, and research institutions, Hoeft noted that it may take some time and strategic planning to obtain it. She recommended that small business owners start talking publicly about what kind of research they are doing and what they need to conduct it.
“Don’t hide under a rock and expect money to magically appear,” Hoeft told CO—. “Get on a stage at a relevant conference [or] start a blog series about your idea.”
Keep in mind that once you start sharing your ideas and what you want to research, “it’s out there in the universe,” said Hoeft. Therefore, protecting your intellectual property before you begin and during the research process is extremely important.
“Ensure your trademarks, patents, and copyrights are in place to protect you and your small business,” Hoeft added.
[Read more: 7 Ways to Find Small Business Grant Opportunities]
Danielle Fallon-O'Leary contributed to this article. Source interviews were conducted for a previous version of this piece.
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