R&D is an important part of every business. But how much should you leave in your budget to cover your R&D expenses?

 

Companies like Alphabet (the parent company of Google and Samsung) invest $15 billion in each company. Microsoft spends $13.5 billion, and Apple invests $10.6 billion. Facebook has also set aside $7 billion along with companies like IBM ($4.7 billion) and Oracle ($5.6 billion), to name but a few research and development cost examples.

 

But that doesn’t answer the question: how much does R&D cost? Or how much should it cost in my industry?

Let’s find out what the average research and development costs are for various businesses and how to calculate how much you should be spending. P

 

Nuances of R&D for a social media project

 

Research and development (R&D) for a social media project has some unique characteristics that set it apart from other types of R&D. Here are some peculiarities of R&D for a social media project:

 

User-centered approach: Social media projects are all about the users, so R&D efforts must focus on understanding user needs, preferences, and behavior. This requires a user-centered approach that involves gathering and analyzing data on user interactions, feedback, and usage patterns.

 

Rapid innovation: Social media platforms are constantly evolving, and R&D efforts must keep up with the pace of innovation. This requires a flexible and agile approach that can adapt to changing user needs and market trends.

 

Big data analysis: Social media generates vast amounts of data, and R&D efforts must be able to analyze and interpret this data to gain insights into user behavior, preferences, and trends. This requires advanced data analytics skills and tools.

 

Security and privacy concerns: Social media platforms are vulnerable to security breaches and privacy violations, so R&D efforts must prioritize security and privacy in the design and development of social media projects.

 

Ethical considerations: Social media has the potential to influence public opinion and behavior, so ethical considerations must guide R&D efforts. This includes ensuring that social media projects are designed to promote positive social outcomes and avoid negative consequences.

 

Integration with other platforms: Social media is often integrated with other platforms and services, such as e-commerce, messaging, and video streaming. R&D efforts must be able to integrate social media projects with these other platforms to provide a seamless user experience.

 

How do you calculate your R&D expenses?

 

The average software or social media company spends about 13.6% of its revenue on R&D. However, if you are a startup, your revenue might not be that high. Instead, you’ll spend the bulk of your budget on R&D as you build products to enter the market with. You can calculate your  research and development cost for your budget in several ways, including:

 

The Percentage of Revenue Method

 

Some companies allocate a percentage of their annual revenue towards R&D by setting a fixed percentage of revenue, such as 5% or 10%, to spend. The number may vary based on the company’s growth prospects or industry norms. Technology companies or companies in highly competitive industries will usually allocate a higher percentage of revenue to R&D to stay ahead of the competition than others.

 

The Benchmarking Method

 

You could benchmark your R&D spending against industry peers or competitors by comparing R&D spending as a percentage of revenue or total expenses to industry averages or competitors’ financial statements. Benchmarking can provide insights into how much other companies in the same industry are investing in R&D and help a company determine if they need to increase or decrease their R&D spending to remain competitive.

 

The Strategic Priority Approach

 

R&D spending can also be driven by a company’s strategic priorities and long-term business goals. For example, if a company aims to be a leader in a specific technology or innovation, it may allocate a significant portion of its resources to R&D in that area. R&D spending can be aligned with the company’s overall business strategy, product roadmap, and innovation goals.

 

The Innovation Pipeline Method 

 

Companies may evaluate their innovation pipeline and allocate R&D spending based on the stage of development of their products or services. They may allocate more resources to R&D for early-stage or high-potential projects that have the potential to generate significant revenue in the future while allocating fewer resources to incremental improvements or maintenance of existing products.

 

The Risk-Reward Analysis

 

Companies may conduct risk-reward analysis to determine the appropriate level of R&D spending by evaluating the potential risks and rewards of R&D initiatives. In this approach, you have to consider factors like market demand, technological feasibility, competitive landscape, and potential return on investment (ROI). Companies may allocate more resources to R&D initiatives with higher potential rewards and manageable risks.

 

How do you know how much your research and development costs should be?

 

Research and development (R&D) spending is a significant investment for big companies, but the actual dollar figure spent on R&D may not be as important as how efficiently those dollars are used and whether they eventually result in increased revenue and profits. One way to measure R&D spending efficiency is through Total Factor Productivity (TFP) or the Research Quotient, which evaluates the return on investment (ROI) for R&D spending.

 

The patience of an organization in waiting for the payoff from R&D activities may vary depending on the industry. Hardware companies are accustomed to longer lead times of three-to-five years or more, while software and tech firms typically expect quicker results. The product roadmap can provide insights into the efficiency of R&D spending. If the roadmap includes initiatives focused on improving existing products, making them more scalable, and addressing customer needs, it indicates that R&D is aligned with the company’s strategic goals. On the other hand, if the roadmap lacks such initiatives and is cluttered with fixes or custom work, it may suggest that R&D is not prioritizing the right projects or not generating meaningful output.

 

Organizations can also evaluate resource allocation for R&D by looking at headcount and budget allocation in addition to the product roadmap. Ensuring that R&D activities are aligned with strategic goals and supported by adequate resources can help companies make the most of their R&D investments. It’s important to strike a balance between innovation and improvement of existing products to achieve scalability and growth while also exploring new opportunities.

 

What do other companies spend on R&D?

 

If you are going to the benchmark approach, you’ll have to start looking at how much other companies are spending. Even if you don’t have billions, it’s interesting to see how R&D is impacting the bottom line for big spenders:

 

• Amazon (AMZN) – Amazon spent $42.74 billion on R&D in fiscal 2020, which accounted for 11.1% of its net sales. Although Amazon does not mention R&D as a separate line item in its financial statements, its expenditure on “technology and content” includes investments in advanced technologies like artificial intelligence (AI), machine learning, and computer vision.
• Alphabet (GOOG, GOOGL) – Google’s parent company, Alphabet, spent $27.57 billion on R&D in fiscal 2020, equivalent to 15.1% of its revenue. The company’s R&D spending has more than doubled since fiscal 2016, with a focus on AI and AI-enabled devices and software. Alphabet was granted 1,817 patents in 2020.
• Huawei – Huawei, a global provider of information and communications technology (ICT) infrastructure and smart devices, spent around $22.04 billion on R&D in fiscal 2020, which constituted 15.9% of its total revenue. Huawei is one of the world’s largest patent holders, with over 100,000 active patents and a strong focus on collaboration and innovation in emerging technologies like cloud computing, 5G, and the Internet of Things (IoT).
• Microsoft (MSFT) – Microsoft’s R&D expenditure was $19.27 billion in fiscal 2020, and it has consistently maintained an overall allocation of 13% of its revenues to R&D over the years. The company’s R&D efforts are focused on reinventing productivity and business processes, building an intelligent cloud platform, and creating more personal computing. Microsoft was awarded 2,905 patents in 2020 and operated Microsoft Research, one of the world’s largest corporate research organizations.
• Apple (AAPL) – Apple spent $18.75 billion on R&D in fiscal 2020, equivalent to 7% of its net sales. Apple believes that focused investments in R&D are critical to its future growth and competitive position in the marketplace. In the first six months of fiscal 2021, Apple reported R&D spending of $10.42 billion.

 

At the end of the day, only you know how much you need to spend on R&D expenses for your social project. Consider where you would like to go in the future and what your odds of success are before whipping out your calculator, and you’ll be fine.