For B2C ecommerce brands, innovation is key not only to success but also to survival. If you’re not putting the effort in to reinvent and reimagine, it’s a safe bet that your competitors are.
With this in mind, research and development (R&D) can be an important weapon in any ecommerce brand’s arsenal, giving you the financial capabilities and competitive edge to continue to grow.
That’s why, today, we’re sharing a comprehensive exploration of the relationship between ecommerce and R&D, helping online business owners understand how and why they should be investing in eligible research and development.
What is R&D?
To properly grasp the benefits of R&D to an ecommerce business, it’s important to first understand what R&D is.
R&D tax credits are government-funded subsidies available to UK companies investing in innovation. Claimed retrospectively, ecommerce SMEs are able to claim on eligible expenditure if:
- you have fewer than 500 staff
- you have a turnover of under €100m or a balance sheet total under €86m
To qualify and enjoy the financial benefits of R&D tax credits, you must also prove that you’ve pursued ‘scientific uncertainty’ - in other words, you’ve pursued scientific or technological advancement without being sure of the outcome. It’s important to note at this stage that your project doesn’t have to have been successful for you to receive subsidisation, providing the project met other key criteria.
What does this mean for ecommerce businesses?
If you’re an ecommerce business or have adapted your business model to include an ecommerce platform, funding will likely be available to you - you may well be surprised at the expenses you’re able to claim back.
For any ecommerce business, you’re likely to have conducted qualifying research and development upon building your own bespoke ecommerce platform. This is true even if you’ve modified off-the-shelf software, providing it has been ‘transformed substantially’ from its original capabilities.
What are the benefits to ecommerce businesses?
Ecommerce SMEs who claim R&D tax credits can benefit from a significant cash injection.
The funding you qualify for will subsidise any associated cost, meaning you won’t have to sacrifice any equity in your business. You’re free to utilise your funding in whichever ways you see fit, but it’s not uncommon for R&D credits to be reinvested in R&D, leading to further product line innovation (and further claims) down the line.
R&D tax credits enable ecommerce businesses to kick-start an innovation cycle that keeps the business and its bottom line growing in the long term.
Understanding R&D funding
To understand what R&D funding will be available to your ecommerce business, you first need to understand how it’s calculated.
The amount of funding your R&D project is eligible to receive is calculated based on a proportion of the costs incurred during research and development activity.
- Employee costs - you can claim back a proportion of salary/wages, NI contributions and pension contributions for staff working directly on your qualifying R&D project
- Subcontractor costs - you can claim back 65% of associated costs if you’ve used a subcontractor for your R&D
- Software - you can claim back software licence fees and a share of associated purchase/running costs for relevant software
Sounds simple, right? And it can be - providing you’re able to suitably match your qualifying costs to qualifying activities. What we mean by that is that it’s not enough to simply state you spent X amount in the pursuit of R&D - you need to be able to demonstrate how those costs contributed to qualifying work.
Let’s take a look at some examples...
Examples of R&D in ecommerce
Qualifying criteria for R&D tax credits can be extensive, providing you’re ticking the right boxes.
For an ecommerce business, your website may make use of many innovative ‘technologies’ that could help you qualify for tax relief. Of course, if you’ve built a platform from scratch, it’s possible you’ve ticked many of the right boxes from the get-go. Even if you’ve used a generic software template package, making relevant and purpose-driven modifications could see you begin to integrate qualifying R&D activity.
To help you understand how this could pertain to your ecommerce business, here are some real-world examples of the types of qualifying activity you could undertake:
As a rule of thumb, the more bespoke your ecommerce platform is, the greater the likelihood that you’ve conducted qualifying research and development.
Of course, the scope for ecommerce platform capabilities is now huge, meaning there are various avenues for you to explore in the name of development. These include but are in no way limited to:
- Voice search optimisation
- Multiple third-party integrations
- Advanced search functionality
Customer personalisation is now at the forefront of user experience, and for good reason - it enables you to tailor your platform to a specific customer, maximising the likelihood of conversions by suitably optimising your site for users’ specific wants and needs.
Sounds complicated, right? And it can be - this personalisation often utilises search terms, location and user behaviour data, meaning the programming involved here entails far more than basic coding and algorithms. With this in mind, attempting to integrate these features into a new or existing ecommerce platform may well see you taking on suitable ‘scientific uncertainty’ in the name of innovation.
Although it may sound like something straight out of The Matrix, augmented reality (AR) is becoming an increasingly popular and accessible technology.
We’ve already seen AR begin to be utilised by many ecommerce fashion retailers, with futuristic app capabilities that enable customers to virtually try on items. With this technology still in its infancy in the grand scheme of things, integrating this into your ecommerce platform now is likely to include plenty of innovative, R&D-eligible activity.
Payment gateway development is often outsourced to payment vendors, who are continuously conducting their own research and development to keep their payment options at the forefront of the market.
Although being continuously developed, current hurdles in payment gateway evolution include reducing friction in checkout processes, offering versatile payment methods on a global scale and accommodating cryptocurrencies such as Bitcoin.
We’ve seen e-wallets emerge in recent years, and investing in similar technologies and integrations could well see your ecommerce platform benefit from qualifying R&D expenditure.
Cybersecurity should be a primary concern for any online retailer.
From hacking to fraud, there are a whole host of online dangers that can damage both your brand and your customers. With this in mind, investing in cybersecurity technologies is not only a good way to explore some potential R&D avenues, but is also vital to the success of your business in the long run.
Current defences against cybersecurity risks include more intricate data encryption and customer authentication, although biometrics is now emerging as the leading technology in this area. This replaces your standard password protection with fingerprints or voice recognition software, making login details far harder to mine or forge.
Of course, such technologies don’t come without their challenges to both software and hardware integration. However, regardless of the success of the outcome, investing in this tech could be an effective way of optimising your R&D claim.
Who should be involved in your R&D?
As we’ve already touched on, R&D can be a fruitful way for ecommerce businesses to ensure higher customer lifetime values and, as a result, greater business growth. With this in mind, sparking and nurturing a culture of innovation, research and development within your company can be effective in ensuring R&D becomes a part of your everyday.
But who should be involved in making R&D decisions for your ecommerce business?
Have the member of your team most authentic to the brand be the heart and soul of your innovation by having them lead the way with idea generation and market opportunity identification.
Lead developer and designer
Your lead designer is the engine of your R&D motor. Not only can they think big in terms of concepts, but they also have the skills to put this into practice.
Researching and developing a concept outside of your in-house expertise? Ensure you’ve got the right person for the job by sourcing suitable specialists.
Pursuing a new technology or integrating new capabilities onto your platform? Be sure to consult your marketing team to understand how viable an idea is in terms of consumer demand and profitability.
If your ecommerce business is yet to open the door to research and development, there’s no time like the present. With the ecommerce industry growing at breakneck speed, R&D can be a viable way to ensure your ecommerce business stays profitable and ahead of the curve.
Want to know more about how R&D relates to your ecommerce business? Get in touch with Lumo for bespoke advice today.