What Is R&D for SaaS?
Research and development (R&D) for SaaS has several manifestations:
- Inside the company, R&D is the department that develops new features and products. The team gathers information, analyzes it, and solves existing problems in various areas, like software, marketability, expansion, processes, etc.
- The accounting term covers the spendings that go under the R&D expenses on the income statement.
- In a broader sense, research and development is the process of idea-development within the company, which doesn’t necessarily need to be related to a specific product. R&D teams might have a task to pursue highly-innovative and even far-fetched projects.
Our article will cover the spending on and the importance of R&D for SaaS companies.
How Much Do SaaS Companies Spend on R&D?
We’ve sorted the basics. Now, it’s time to look at the industry numbers and search for a definitive answer about how much you should spend on building and maintaining a SaaS product.
There’s a rule of thumb: ‘Sales & Marketing’ usually receives 40% of revenue, ‘Product and R&D’ gets 20%, and General & Administrative gets 20%.
Excellent research from Blossom Ventures reviewed various companies at their IPO as well as two years before that. The concluding table has a few takeaways:
- 23% of revenue in the listed companies goes to R&D.
- Companies spend millions on research and development. The presented data set median is $21mm.
- There’s a wide range of R&D spend in the industry. Some companies allocate as little as 2%, and others go all in and more (up to 117% according to the research).
- Research and development is a fixed cost at its core. As the company grows, it usually starts reducing its R&D allocation percentage but continues getting a similar result.
As we’re exploring the importance of R&D, we should take a look at two areas it impacts: the product and the leadership.
Importance of R&D for Product
With a fast-growing technological backbone and an agile research and development strategy, you might get more sophisticated products faster and cheaper these days.
Different companies follow varying approaches for their R&D spending, team quotas, and tasks. Some might want to work on their existing product and market, choosing one of the following:
- Make incremental changes inside your current product.
- Introduce core improvements to your product.
- Keep the essential operations going.
Other SaaS entities might want to explore a completely new product and expand into new markets.
Most successful companies have a working combination of these two.
On one end, there’s ‘shooting for the moon,’ whereas on the other, there’s playing around with new features of an existing product. Either way, resources allocated to R&D make it the main battleground where the search for innovation happens.
Many companies just throw money and human resources at research and development, hoping that something astounding will happen. However, new and efficient ideas don’t mysteriously appear. They’re an outcome of calculations, trial, and error.
Data Is Essential
Setting up and monitoring product-related metrics is the way to making sure that you don’t waste precious resources chasing non-viable research and development projects. Many different data points and calculations exist out there. However, every SaaS company should handpick a few objectives that complement its vision.
Build your R&D strategy around these metrics; you’ll have more useful features, better UX, a higher level of product insight, and better processes in general.
Importance of R&D for Leadership
We’ve touched upon the decision-making power of SaaS metrics in past articles. However, we should refresh our approach from an R&D perspective.
By infusing data and metrics into the research and development processes, you gain a superpower. Suddenly you have a more in-depth knowledge of the company’s moving parts. Developing new products or dropping the ones that don’t work becomes a straightforward task.
Data-backed decision-making is the best weapon a company executive can have. You can stay relevant and follow trends by taking faster, more conscious steps towards your goals. Research and development allows you to cut costs, improve your marketing strategies, and find new ways to be productive.
Collaboration Leads to the Vision
When R&D shares new features, it creates a situation where all the company teams can join skills and participate in building a successful product. Marketing can help R&D during a new feature launch; support can pass customer feedback to marketing. R&D can gather information and analyze the positive and negative experiences from support and implement a better solution next time.
All in all, only in this collaborative feedback loop can the progress take place. If the teams work together, the company might well achieve its mission.
In the fast-paced, data-infused world, the importance of R&D has become even more apparent. First, it improves the product, and second, it makes executive decisions easier.
SaaS companies need to find ways to let the funds flow into the most critical parts of the business. To make R&D spend specific, set goals for the department. Find stats and metrics that will exclude any unnecessary expenses. Then rinse and repeat.
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