Research and Development as a Percentage of Revenue (R&D%)

What is R&D in SaaS and why is it so important?

In the SaaS industry, ongoing investments in research and development (R&D) are essential for maintaining competitiveness. R&D encompasses all the activities associated with building, maintaining, improving, and innovating the products that SaaS companies sell.

For SaaS companies, R&D is the foundation of product development and can impact a company’s growth in several ways.   

1. Product development and innovation

R&D drives the development of new features while enhancing existing ones. It enables startups to explore emerging technologies and address evolving market needs. 

2. Strategic decision-making

R&D provides data-driven insights that help finance teams assess the viability of new projects and optimize resource allocation. Leaders rely on R&D as a percentage of revenue and other metrics to determine whether to continue investing in innovation or shift focus elsewhere.

3. Customer acquisition and retention

R&D is an investment that directly impacts a startup’s ability to attract and retain customers by developing features that address customer pain points and enhance user experience. 

As companies progress through different stages of maturity, R&D spending becomes a fundamental driver of competitive advantage and financial performance.

R&D spending across the SaaS lifecycle

SaaS investments in R&D are strongly influenced by a company’s maturity: 

Generally speaking, SaaS companies that invest heavily in R&D tend to achieve higher growth rates and stronger investor valuations. However, this isn’t true across the board. In markets where innovation is a key differentiator, high R&D spending is important whereas in more commoditized segments, companies may need to prioritize sales and marketing to capture market share.

How is R&D as a percentage of revenue calculated?

Before we start talking about how to calculate the metric, let’s do a quick review of the expenses that make up the R&D part of the equation. 

Common R&D expenses in SaaS

For SaaS companies, R&D expenses include:

• Personnel costs: These include all employee-related expenses for software engineers, research scientists, data analysts, UX designers, and product managers that work to develop, maintain, and innovate products that a SaaS company sells.
• Software development costs: Software development costs in SaaS companies include investment in development tools and frameworks and third-party integrations.
• Cloud infrastructure costs: This includes cloud computing services, high-performance hardware, software licenses, and tools that enable research and product development specifically. Cloud costs associated with the delivery of SaaS would not be considered R&D but are instead treated as part of the cost of goods sold.
• Intellectual property and patent costs: These are software and tool licensing costs for specialized development environments, advanced analytics platforms, artificial intelligence research tools, and complex testing frameworks. 

The R&D as a percentage of revenue formula with an example calculation

The formula for calculating R&D as a percentage of revenue is simple. It’s calculated by dividing the total cost of R&D (all the expenses in the list above) by total revenue, then multiplying by 100:

Let’s look at an example calculation for a mid-stage SaaS company with the following financial data:

• Annual revenue: $5 million
• Engineering team costs (10 developers): $1.5 million
• Product management team costs (2 managers): $300,000
• Design team costs (2 designers): $250,000
• QA team costs (2 testers): $200,000
• Development infrastructure and tools: $250,000

Total R&D expenses: $2.5 million

R&D% of Revenue = ($2.5 million / $5 million) × 100 = 50%

This 50% figure is fairly typical for a growth-stage SaaS company that has established a product-market fit (PMF) but is still heavily investing in product development to drive future growth.

Looking at R&D as a percentage of revenue in isolation can be misleading, though. For example, high R&D spend as a percentage of revenue is not necessarily bad assuming the return on those dollars is high. For example, a company investing in an entirely new, innovative product starting from the ground up may have a high R&D percentage of revenue because they are investing ahead of revenue.

Other important metrics to look at when evaluating R&D investments

The R&D as a percentage of revenue metric is most useful when considered alongside other SaaS metrics, which together can provide a more complete view of R&D efficiency and effectiveness:

R&D headcount ratio

It’s the percentage of R&D employees relative to total headcount indicates a company's focus on product development. 

• Early-stage SaaS companies typically have 50-70% of employees in R&D
• Mature companies see this drop to 30-40% as sales, marketing, and customer success teams grow.

Formula

R&D productivity

This metric measures how effectively R&D investments drive revenue. It becomes critical from Series B onward when companies invest in new products beyond their core offering.

Formula

SaaS industry benchmarks for R&D spending

Industry benchmarks for R&D spending can vary widely based on a company’s strategy, market, and growth stage. High-growth SaaS companies often allocate a larger percentage of revenue to R&D to drive innovation, while others may prioritize sales and marketing. 

SaaS Capital recently released its 14th annual spending survey of more than 1,000 private B2B SaaS companies and found that the median ARR spent on R&D was 22%. The report also shows that regardless of company size or funding type (bootstrapped vs. equity backed), R&D spending is higher than any other expense category. 

BenchMarkit’s 2024 B2B SaaS Performance Metrics Benchmark Report, which also surveyed about 1,000 private companies, shows a median of around 31% of revenue invested in R&D. 

Benchmarking your R&D spend to other SaaS businesses can be useful, however, it shouldn’t dictate strategy. Every company optimizes their R&D spend based on its unique strengths:

• Product-led companies invest heavily in R&D to differentiate through innovation.
• Sales-driven SaaS businesses focus more on go-to-market execution.

R&D is a high-impact, but finite resource. Simply matching industry benchmarks isn’t enough. SaaS companies must ensure every dollar spent aligns with long-term business objectives, driving both product excellence and sustainable growth.