Doing research and development for your business without any formal processes? You might benefit from using an innovation funnel. 

As R&D tax credit specialists we’ve seen clients with big, promising innovations have to pause development due to having too many innovation costs in their pipeline. Putting a system into place for your R&D process means you can prioritise the best ideas and filter the others out.

What is an innovation funnel?

Business growth in many sectors demands new ideas, whether that’s diversifying your product range, finding a more efficient manufacturing process or creating technology that solves big problems for your business or customers. 

However, the problem is rarely coming up with new innovations, it’s picking the right ones. With a finite amount of budget to action research and development activities, it’s crucial you select carefully.

One well-established way of doing this is by implementing an innovation funnel. 

This system essentially acts as a filter for all of your potential innovation ideas. The process stress tests them to ensure they’re viable, valuable and worth your investment before you commit significant resources to development.

Let’s break down how.

How does an innovation funnel work?

The funnel filters ideas through various stages at which they either pass or are eliminated. At each stage, ideas are evaluated against increasingly stringent criteria, ensuring only the most promising projects make it through to completion. 

By the end, you should have a shortlist of ideas that have the best potential to earn back their investment.

Learn through examples:

To illustrate each of the stages of innovation, we’ll follow how an imagined cosmetics company, Naturo Beauty Ltd. might tackle that part of the process. 

 The stages of an innovation funnel

1. Ideation

    This first stage of the innovation funnel is all about gathering potential innovation opportunities from every available source. 

    Remember to think outside the box here. The best ideas might come from customer feedback, staff suggestions or even market research findings. Spotting a gap in the market through industry trend analysis is a common way to find innovative ideas that give you an edge.

    Competitor benchmarking is also crucial at this stage to ensure you’re keeping up with, or even outpacing, the competition with your new developments.

    Example of the ideation stage: 

    Naturo Beauty Ltd. gathered ideas from multiple sources: customer requests for plastic-free packaging, their R&D team’s suggestions for waterless formulas to reduce shipping costs and market research showing demand for refillable luxury skincare.

    Note: Remember to keep detailed notes about the innovation process right from the start of your innovation funnel so that you can evidence your R&D activities in your claim submission. 

    If you provide too little detail, you could face scrutiny from HMRC in the form of an R&D tax credit compliance check.

    2. Initial screening

      This first filtering stage is all about evaluating each idea against some basic agreed-upon criteria to determine which ones deserve further investigation. 

      You’ll need to consider whether the idea aligns with your business objectives, whether it’s technically feasible as well as whether you have access to the necessary resources. If not, they represent a cost consideration.

      Most importantly, there needs to be a clear market need and potential return on investment.

      Example of the initial screening stage: 

      The team at Naturo Beauty Ltd. evaluated their refillable packaging concept against key criteria. It aligned with their luxury positioning, showed potential for strong ROI and could be produced using their existing facilities with modifications.

      3. Concept development

        This stage of innovation is where your ideas get fleshed out into detailed plans. You’ll need to outline your project scope, identify technical requirements and set clear budgets and success metrics. By the end you should have a workable plan with defined objectives and measurable outcomes.

        Example of the concept development stage: 

        Naturo Beauty Ltd. created detailed plans for their refillable packaging system, including technical specifications, material requirements, target price points and clear success metrics including sales targets.

        4. Testing and evaluation

          This crucial stage of the innovation funnel is where theory becomes reality. This might mean creating a minimum viable product, model or alpha-phase build. For service-based innovations this could mean a trial run of a new service. 

          You’ll need to:

          • Create and test prototypes
          • Gather user feedback
          • Conduct technical feasibility studies
          • Perform detailed risk assessments
          • Complete cost-benefit analyses

          The idea is to create a fair test of the idea without sinking too much capital into the exercise if it fails. All of this should give you a clearer sense of whether it’s worth carrying the idea over to the final stages of innovation.

          Example of the testing and evaluation stage: 

          The team created prototype refillable containers, testing them with loyal customers to evaluate durability, user-friendliness and premium feel.

          Note: While prototype costs can often qualify for tax relief, recent R&D tax credit restrictions mean you’ll need to clearly demonstrate how each iteration contributed to resolving technical uncertainties.

          5. Development and implementation

            Moving into full development means scaling up your tested concept for market. This stage will see you finalising specifications, setting up production processes and preparing your team for launch.

            Example of the development and implementation stage: 

            Natural Beauty Ltd. began modifying their production line, finalising suppliers and creating online listings for the new range.

            6. Launch

              The final stage requires careful planning to successfully bring your innovation to market, including final details like creating marketing and sales plans and establishing distribution channels.

              Once you’ve launched, make sure you monitor performance and gather feedback so that you can continually improve.

              Example of the launch stage: 

              The company launched their refillable skincare line with a dedicated digital marketing campaign, established their returns system and set up performance monitoring.

              Alternative innovation funnel models

              What we’ve described above outlines a traditional innovation funnel. However, it’s worth noting that there are some variations on the model that are used in particular scenarios. Let’s take a look at them in case they apply to your sector or services.

              The Stage-Gate Model

              The name itself describes the core difference between this model and the traditional type we’ve taken you through. This model is usually applied to industries where risk management is a top priority, like aerospace or pharmaceutical companies. 

              In essence, it involves meeting formal criteria (aka. Overcoming the ‘gate’) before the project can proceed to the next stage.

              A typical Stage-Gate structure looks like this:

              • Gate 1: Initial Screen
              • Stage 1: Scoping
              • Gate 2: Second Screen
              • Stage 2: Build Business Case
              • Gate 3: Go to Development
              • Stage 3: Development
              • Gate 4: Go to Testing
              • Stage 4: Testing & Validation
              • Gate 5: Go to Launch
              • Stage 5: Launch

              Lean Innovation Funnel

              The second variant that you might encounter is the Lean Innovation Funnel.

              Instead of extensive planning and perfect execution, it focuses on rapid development and learning from real customer feedback.

              The process follows a simple cycle:

              • Build: Create the simplest working version of your idea (a Minimum Viable Product)
              • Measure: Gather real user feedback and data
              • Learn: Use this information to improve the next version
              • Repeat: Keep cycling through these steps, improving with each iteration

              This approach works particularly well for software companies, startups and digital products where quick market entry is vital for success. 

              Get up to 27% of your innovations funded by the government

              While an innovation funnel helps you pick the right projects, you’re still investing significant time and money into developing new ideas. The good news is that the government incentivises R&D activities through the R&D tax credit scheme. This could help fund your innovation.

              Through R&D tax credits, you could get back up to 27% of what you spend on innovation. 

              We know innovation is complicated enough without adding tax relief into the mix. That’s why we make claiming R&D tax credits as simple as possible for you. 

              Talk to our R&D specialists

              We can manage every aspect of your R&D tax credit claim process, from gathering necessary details, through to submission and even support with any queries from HMRC.

              Ready to find out how much you could claim back? Our team will be happy to discuss the particulars of your business. 

              Contact us today at 0161 399 0121 or via info@williamsoncroft.co.uk to start the conversation.

              Further reading

              Want to find out more about how R&D tax credits work? We’ve built up a library of helpful guides on this specialism. Find out…