In any industry, even the most revolutionary products and services are rarely fully conceptualized on day 1. Most often, success in the market stems from extensive, effective research and development (R&D). This is especially true for small businesses, which contribute a significantly higher percentage of sales to R&D work than larger businesses.
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 partake in R&D activities, though the amount of investment can vary. For example, technology and health care companies tend to have higher R&D expenses, as do enterprises with larger budgets.
Typically the first step in the development process, 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.
[Read more: 7 Ways to Find Small Business Grant Opportunities]
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 and improve existing ones. For example, a team of development researchers may test the hypothetical company’s new toy or implement feedback obtained from customers.
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 research and development.
Becca Hoeft, CEO and Founder of Morris Hoeft Group
Why invest in research and development?
While R&D can require a significant 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 your findings to your 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 as well as identify inefficiencies in their workflows. Insights from R&D activities can illuminate ways to improve operations as well as where to most effectively allocate resources, increasing overall efficiency.
Cost reductions
While developing a well-researched product or service that performs well is likely to maximize profit, 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. For one, the federal R&D tax credit offers a dollar-for-dollar reduction in tax liability for businesses that partake in various research-based activities. Eligible companies can apply for this credit by submitting Form 6765 with their business taxes.
[Read more: How to Seek Funding for Your Invention]
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 research and development.”
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: How to Qualify for and Claim the R&D Tax Credit]
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