In today’s fiercely competitive market, you need research and development (R&D) to stay relevant and own a significant market share. Investing in research and development allows you to break into new markets, develop new products or services, improve existing ones, and reduce operating costs, leading to more sales.
However, not all research investments will help your business grow. So how do you know if your research investment is paying off?
One of the most common and effective metrics is Return on Research Capital (RORC) for tracking if projects are profitable or not. Let’s look at how the return on research capital can help you make better decisions about your research projects and grow your business.
Return on research capital (RORC) is a metric that allows you to assess the effectiveness of research and development (R&D) activities. It measures the value of research investments by comparing the revenue generated from research outputs to the cost of research.
RORC helps you to identify research projects that are generating the most value and use the information to allocate R&D resources. You can also use RORC to evaluate your company’s R&D performance against that of competitors.
Return on Research Capital (RORC) vs. Return on Investment (ROI)
RORC is very similar to return on investment (ROI), but it specifically focuses on the value of research investments. You can use ROI to evaluate the value of almost any investment such as a marketing campaign or a product launch.
Also, RORC is a bit harder to measure than ROI because it’s difficult to measure the value of research investments like new products and patents.
Knowing your RORC helps ensure your research investments are paying off. Here’s what you need to calculate your RORC:
Find the Components of RORC
Before diving into calculating the return on research capital, you have to first find its components:
Exploring Content Validity in Research: Definitions and Real-World Examples
So, How Do You Calculate RORC?
Simply use the RORC Formula:
RORC = (Research Outputs / Research Investment) * 100
Example 1- Calculating RORC of Company A
Company A
RORC = (1 million / 2 million) * 100 = 50%
So, Company A generated $50 in revenue for every $100 invested in research.
Research investment helps you to identify new markets and opportunities, which helps you focus your money on the right products or services, and maximize profit.
Short-term investments focus on creating products and services that you can launch and make profits from almost immediately. Long-term investments are more in-depth research that might not make money for a while but could potentially revolutionize products and services down the line.
Balancing short-term and long-term research investments will ensure that your business isn’t drowning in losses. Make sure your short-term investment profit can cover the cost of your investments, so you don’t have to worry about going bankrupt before your longer-term investments start bringing in profit.
Here is a step-by-step guide to help you effectively evaluate research outputs to help you determine if your investments are paying off:
Research outputs are the tangible and intangible benefits that are generated from research and development (R&D) activities. The following are the most common types of research output:
Some research outputs, such as new knowledge and skills, can be difficult to measure and quantify. These intangible outputs are often referred to as “soft outputs.”
There are several obstacles to measuring intangible research outcomes. First, intangible research outputs are hard to define and implement. They also have long-term effects, making it difficult to measure them in the short term.
There are two types of factors that influence your RORC. Here’s a breakdown of how they work:
How Can Companies Optimize RORC?
Both internal and external factors affect RORC, so you need to carefully consider both internal and external factors, so you can adjust your research strategy, team, and resource allocation.
There’s no 100% guarantee your research investments will lead to successful outcomes. The following are strategies to help you enhance your return on research capital:
Effective research means carefully selecting and prioritizing research projects based on their potential impact on the company’s strategic goals and objectives. You can do this by setting SMART goals and allocating resources to projects in a way that optimizes the overall risk-reward profile of the portfolio.
Create a company culture where employees think creatively and take risks. Also, provide them with the resources and support they need to accomplish their goals effortlessly.
Another way to foster innovation is to recognize and reward employees for their innovative and research contributions. You can do this with formal reward programs, public recognition, salary bonuses, and more
This provides you with access to innovative ideas, technologies, and tools. For example, you could collaborate with universities, research institutes, companies, and independent scientists to have top talents and enough resources for your research.
Regularly review your research portfolio and make changes to prioritize projects with higher RORC.
Success stories inspire us to achieve difficult goals, so let’s take a look at some real-world examples of businesses with thriving RORC:
Amazon is one of the most successful companies in the world with a strong track record of developing successful new products and services. A major reason for this is its heavy investment in R&D.
A great example of Amazon’s RORC excellence is its Prime subscription program. Prime was launched after a lot of market resarch in 2005 to build brand loyalty, optimize customer experience, and boost sales.
Prime members pay an annual subscription fee, and receive several benefits, including free two-day shipping on most items, access to exclusive deals, and streaming of movies and TV shows. Most customers found the subscription fee worth it, and it has helped Amazon grow its market share to become the dominant player in e-commerce.
Alphabet is the parent company of Google, and it is one of the world’s largest investors in R&D. The company invests in a wide range of projects, including artificial intelligence, self-driving cars, and life sciences.
The Android OS is also a good example of Alphabet’s RORC excellence, it was launched in 2008, a time when people were searching for a low-cost, user-friendly alternative to iOS.
After years of research and development, when Alphabet released Android, it was a huge success. This helped the company become the market leader in mobile operating systems. As of 2022, Android accounts for more than 70% of the global mobile OS market share.
The RORC is an effective method for understanding how well your investments are paying, but it’s not flawless. Here are some common errors to avoid when assessing RORC:
Stop Guessing, Start Knowing: Discover powerful insights with our Correlational Research Template.
With so many technological advancements, there are always new and innovative ways to track and manage research on research capital. Here are a few examples:
Here are some new and improved ways of measuring and monitoring RORC:
There are so many new rules and regulations to guide research, to protect both the research and the target audience during the research and development process. The following are some of them:
Industry trends
Most companies in competitive industries are coming up with new ways to handle their research and development investments.
For example, most companies use rigorous portfolio management techniques and data analytics to ensure that they are investing in the right projects and improving the efficiency of their R&D processes.
Regulatory Standards
RORC allows you to assess the effectiveness of R&D activities and make informed decisions about future R&D investments. It also works with other factors, such as customer satisfaction levels, product quality, and long-term competitive advantage to give you a full picture of how well your research investment is going.
We hope this guide helps you make informed decisions about your research investments and get amazing returns on your research capital. Kickstart your market research with our user-friendly market research software!
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