When you hear “research and development,” you might picture scientists in lab coats or tech geniuses coding the next big app. While that image isn’t wrong, it barely scratches the surface.
Research and development (R&D) is not limited to science, pharma, or tech giants. It’s a critical driver of innovation and growth for businesses across industries. By investing in R&D, companies can gain a competitive edge, create new products and services, and adapt to changing market demands.
This guide breaks down what R&D is, explores its different types, and explains why it’s worth the investment.
What is research and development?
Research and development is the process of expanding knowledge to create new products, services, or technologies. It helps businesses stay competitive by introducing innovative products or improving existing offerings. Prioritizing R&D can lead to stronger market positioning, increased revenue, and meaningful contributions to economic growth and social progress.
Any business that creates and sells a product or service, whether it’s software or spark plugs, invests in some level of R&D. For example, a spaghetti sauce brand’s variations on their original product—Chunky Garden, Four Cheese, and Tomato Basil Garlic—are the results of extensive research and development.
R&D typically involves these key steps:
- Market research: Analyzing customer needs, preferences, and pain points to identify opportunities for innovation.
- Ideation: Generating and evaluating ideas for new products or improvements to existing ones.
- Concept development: Refining selected ideas into detailed product or service concepts.
- Prototyping and testing: Creating prototypes or minimum viable products (MVPs) to validate concepts and gather feedback.
Also note that the R&D process isn’t just about developing new products or improving existing ones. Sometimes, research experiments can lead your business in a more profitable and scalable direction.
“When we started the concept of a street food restaurant, it was focused on a singular hero product,” Jen Liao of MìLà shares on the Shopify Masters podcast. “Then during COVID, we had to shut down for a few weeks, and we began experimenting with our chef—exploring what else we could do to potentially pivot the business. Since soup dumplings are a cousin to that hero product, we started with that as an experiment, thinking it’s kind of a logical product for us to test out.” Also on that episode, Jen talks about how a recipe experiment sparked the idea to pivot her street food restaurant into a full-blown DTC brand.
Types of research and development
R&D typically falls into three categories: basic, applied, and developmental research.
Basic research
Basic research (also known as fundamental research) focuses on improving the general understanding of a particular problem, phenomenon, or human behavior. This type of research may not have a specific commercial goal or immediate practical application.
Its primary objective is to explore broad questions and generate new knowledge that may eventually inform future innovations or applications.
Some examples of basic research questions include:
- Why do mice get caught in traps?
- Why are some people allergic to gluten?
“R&D is a long-term, iterative-type endeavor,” says Igor Golovko, co-founder and chief technology officer at TwinCore. “In our experience, successful innovations came not from the one-off eureka moments but from months and sometimes years of research, trials, and refinements.”
Basic research often leads to future innovations but requires significant funding and long-term commitment. That’s why it’s usually conducted by universities and government agencies. Some large companies also invest in it to build foundational knowledge that can drive future innovation and competitive advantage.
Applied research
Applied research focuses on solving specific, practical problems. It is targeted and typically leads to a specific product, process, or outcome.
At this stage, the goal is to apply existing knowledge to develop solutions that can be implemented in the real world—often in response to market demands or operational challenges.
Some examples of applied research questions include:
- How can we build a better mousetrap?
- What combination of flours will produce the best gluten-free pie crust?
Applied research builds directly on the insights from basic research and is often a bridge between theory and application. It’s commonly used in commercial settings, where results need to be actionable and deliver measurable value.
Developmental research
Developmental research (or experimental development) involves using knowledge gained from basic and applied research to create new products and services, or to significantly improve existing ones.
Its objective is to transform research findings into tangible outcomes (e.g., product development, prototype test or launch) that meet customer needs.
Here are some example outcomes of product development research:
- Developing a smart mousetrap that alerts users via a mobile app.
- Turning a lab-tested gluten-free flour blend into a packaged retail product.
Developmental research is where innovation turns into a product or solution. It’s typically carried out by businesses and R&D teams looking to commercialize new ideas or extend product offerings.
“Push out MVPs (minimum viable products) to test on the consumer base,” says Forrest Webber, business analyst and founder of The Trade Table, a boutique online store for home products. “If they respond well to it, continue development and testing as you put more resources into the product.
A good rule of thumb is to ship an MVP within a month, if possible, to test before continuing; you don’t want to waste time and additional resources.”
Why invest in research and development?
While the overarching goal of research and development is to add to a company’s bottom line, companies undertake R&D for a variety of reasons, such as:
- Staying competitive: Prioritizing R&D allows companies to offer new and improved products and services to customers and stay ahead of competitors. For example, Apple invested $31.4 billion in R&D in 2024, which is over 8% of its yearly revenue.
- Driving innovation and new opportunities: R&D helps businesses to discover new market opportunities, experiment with advanced technologies, and address emerging customer needs before competitors do. For instance, Amazon invested $85.6 billion into R&D in 2023—approximately 14% of its revenue. With continuous innovation in cloud infrastructure (AWS), automation, and logistics, Amazon dominates these markets.
- Improving operational efficiency and reducing costs: Profits aren’t the only way that research and development can pay off. In fact, many companies focus their R&D on improving existing technologies and internal processes. This can help you reduce the overall cost of bringing your products to market. “In my experience, real value often comes from quietly improving backend operations,” says Joel Popoff, CEO at Axwell Wallet. “For example, reducing transaction costs or simplifying packaging can make just as much difference as launching a new product line. In consumer goods, especially when margins are tight, refining your supply chain can boost profit faster than launching something new. But I see brands overlook that every day. R&D should focus on increasing value, not just increasing SKUs.”
- Securing investment: Even if your research efforts aren’t immediately profitable, they may point to future innovations or developments that investors are excited to support.
Despite economic downturns, a pandemic, and political unrest, global research and development spending has nearly tripled—from around $1 trillion in 2000 to more than $2.75 trillion in 2023.
Who handles research and development?
Often, research and development activities are handled in-house by an internal department in a company, but you can also outsource it to external consulting experts, agencies, or universities.
Large multinational companies might do all three types of R&D in-house. They may also outsource specific research projects to other countries to get access to their talent and local market insights.
That said, here are some key roles in R&D teams:
| Role | Key responsibilities and contributions |
|---|---|
| Researchers | Conduct basic/applied research, generate new ideas, validate concepts through experiments, and lay the theoretical groundwork for innovation. |
| Engineers | Convert research into practical applications, develop prototypes, conduct feasibility studies, iterate designs, and ensure real-world viability. |
| Project managers | Manage R&D project lifecycles, set timelines, coordinate resources, budgets, and stakeholders, ensure projects align with organizational goals. |
| Technicians and specialists | Support practical research tasks, manage laboratory equipment, maintain records, assist experiments, and ensure compliance with safety and standards. |
| Product development professionals | Bridge innovation and market needs, collaborate with marketing/sales, ensure products meet customer expectations and commercial viability. |
Your organization structure can also significantly influence R&D efficiency and results. Here are some common organizational structures:
- Centralized structure: Consolidates innovation efforts and resources and reduces redundancies, but can also slow down decisions due to hierarchy.
- Decentralized structure: Can accelerate decisions and improve agility, but may increase risks of redundant efforts due to lack of coordination.
- Hybrid structure: Combines centralized oversight of core research with decentralized agile teams—offering both strategic alignment and flexibility.
If you’re a solopreneur or a small business owner, hiring an external agency for your research and development tasks might be more feasible for you. For example, if you’re planning to launch a D2C health supplement brand, you could outsource your R&D tasks to companies like Food Research Lab or Superior Supplement Manufacturing.
Alternatively, you can source products from reliable dropshippers who handle end-to-end product operations—from product research and development to fulfillment.
Which research and development method is right for you?
Consider the following factors to identify the most suitable R&D approach for your business:
- Innovation goals: Are you focusing on groundbreaking discoveries or incremental improvements?
- Time-to-market: Are you looking for short or medium-term commercial gains or long-term foundational insights?
- Resource availability: Does your organization have the necessary funding, talent, and infrastructure to support your chosen method?
- Market demands: Are customers seeking immediate solutions or long-term innovations?
“For me, a good R&D method is rooted in data and built around agile development. Data gives you a clear signal on what to build and what to skip,” says Joel. “When we developed our Copper Axwell Wallet, we kicked things off with concept testing. We polled our customers to see if a wallet with a copper finish was worth pursuing. Feedback showed strong demand, especially from buyers looking for something bold but still premium. That early signal gave us the confidence to move forward without second-guessing.”
Here’s a quick guide, with examples to help you determine the best R&D method for your needs:
| R&D method | Best suited for | Example |
|---|---|---|
| Basic research | Organizations seeking long-term innovation, foundational knowledge, or breakthroughs without immediate commercial use. | Global automobile giants researching renewable energy sources (solar, biomass, hydropower, etc.) to expand foundational knowledge for future innovation. |
| Applied research | Companies aiming to solve specific problems, improve existing products, or develop practical uses for new technologies. | Pharmaceutical firms performing clinical trials for new drugs targeting specific illnesses. |
| Development research | Businesses focused on immediate market impact through product creation, improvement, or commercialization. | Ecommerce and D2C startups improving product quality based on customer feedback or developing new product lines to stay ahead of competitors. |
“If your R&D is good, your team starts asking better questions and your product stops running into dead ends every three months. You feel it. Sales stops blaming the product, support gets quieter, and suddenly your roadmap doesn’t feel like a shot in the dark,” says Vadym Nekhai, chief growth officer at Kitcast.
“I look at how fast we adapt and how often we surprise ourselves with new thinking that gets shipped. If ideas go from the whiteboard to production faster, and they stick—you’re doing something right.”
R&D accounting best practices
Research and development often involve significant investment with uncertain returns. Unlike typical business assets, R&D expenditures rarely generate immediate profits and are commonly classified as business expenses under standard accounting practices.
For small businesses, R&D accounting requires careful planning and adherence to financial and regulatory standards.
Here are some key considerations you should be aware of in R&D accounting practices:
- Expensing vs. capitalizing R&D costs. Most R&D costs must be expensed as incurred under GAAP (generally accepted accounting principles). In some cases (e.g., software development), you can capitalize costs once certain criteria are met (e.g., feasibility established). Consult with an accountant to determine whether any of your R&D expenses are eligible for capitalization under IRS or local accounting rules.
- Budget management. As a small business owner, you need to be strategic with R&D budgets. Follow R&D budgeting best practices such as allocating funds in phases (discovery, prototyping, testing), tracking costs by project or cost center, and regularly reviewing budget to avoid overruns. “We subdivide larger R&D initiatives into smaller phases or milestones. This allows for progress validations at various stages while being able to adapt budgets,” says Igor. “For example, in building one AI feature for our platform, we first undertook a feasibility study to ascertain some of the possible technical and financial challenges. A small budget allocation for that phase allowed us to learn more without a big commitment in the beginning. Once feasibility was established, we could scale it up.”
- R&D tax credits and deductions. Governments often provide tax deductions to promote innovation. In the US, for example, small businesses (particularly startups with little or no income tax liability) can offset up to $500,000 annually of their payroll tax liability under the qualified small business payroll tax credit.
- Compliance with regulations. You must comply with local tax laws, financial reporting standards, and industry regulations related to R&D. This includes recordkeeping, financial disclosures, and audit readiness. Make sure to keep your records (invoices, timesheets, and reports) well-organized to support your R&D claims during audits.
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Research and development FAQ
What are the three types of R&D?
The three main types of research and development are:
- Basic research: Focused on expanding knowledge without immediate commercial objectives (e.g., studying new textile properties).
- Applied research: Aimed at solving specific problems or improving products/processes (e.g., testing a new fabric for breathability).
- Development or product research: Involves turning research into market-ready products (e.g., creating and testing a new line of activewear).
What is an example of research and development?
An example of R&D would be a direct-to-consumer (D2C) cosmetics brand researching new skin care ingredients (basic research), testing their effectiveness and safety through lab trials (applied research), and formulating them into a new moisturizer or serum (development research).
Is research and development an operating expense?
Yes, research and development is generally considered an operating expense. Under US GAAP and many international accounting standards, R&D costs are expensed as incurred because they don’t typically result in immediately measurable revenue. This includes costs like employee wages, lab materials, testing, and prototype development. However, some exceptions may apply. So, it’s best to consult a tax adviser or accountant to ensure accurate eligibility, documentation, and calculation.
What is the research and development tax credit?
The R&D tax credit is a US government incentive aimed at encouraging businesses to invest in innovation. It provides a dollar-for-dollar reduction in tax liability for qualified research expenses (QREs), such as developing new products, processes, or technologies. For small businesses and startups, the credit can also offset payroll taxes which makes it accessible even for companies with no income tax liability.
