In business strategy and planning, understanding the full extent of your market opportunity is essential. One of the most significant aspects of this process is the determination of your Serviceable Obtainable Market (SOM).
SOM represents the market portion that a company’s products or services can realistically capture within a specified timeframe. It offers a pragmatic estimate based on your company’s capabilities and resources, competitive environment, and the specific demographic you serve. SOM is a guiding star, illuminating the pathway to sustainable growth and profitability.
The importance of identifying your SOM cannot be overstated. It enables businesses to strategize effectively, make informed decisions, and predict revenues more accurately. Furthermore, it allows investors to assess a company’s potential for success within their target market. Finally, a thorough understanding and calculation of SOM often distinguish leading businesses from those that lag.
This article will take you through a comprehensive understanding of SOM, its significance, and the methodology to determine it accurately. By the end of this exploration, you will be equipped to pinpoint your serviceable obtainable market and effectively integrate it into your business strategy and conversations with potential investors. So buckle up and embark on this journey to uncover a critical factor that could significantly influence your business growth.
Understanding Key Market Definitions
Before we delve into the intricacies of SOM, it is essential to lay down a robust foundation by understanding three crucial market definitions that are often used interchangeably but carry distinct meanings: Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM).
Detailed Explanation of Total Addressable Market (TAM)
TAM refers to the total demand for a product or service across all potential customers. It’s the maximum revenue a business could achieve with 100% market share. According to the Market Research Future report of 2023, the global TAM for the e-commerce industry is projected to reach an impressive $7.3 trillion by 2025. However, it’s worth noting that capturing the entirety of the TAM is usually an unrealistic goal for most businesses.
Understanding Serviceable Available Market (SAM)
SAM is a step down from TAM. It represents the segment of the TAM that can be reached and served by a company’s products or services. It accounts for various limiting factors such as geographic reach, distribution capabilities, and targeted demographics. For instance, in the context of the e-commerce industry, if a company primarily operates in North America, the SAM would consider only the e-commerce demand within this region. According to Statista, the e-commerce market in North America was valued at approximately $1.4 trillion in 2022, which can be considered the SAM for a North America-based e-commerce business.
Definition and Importance of Serviceable Obtainable Market (SOM)
SOM is the most specific and realistic of these three terms. It represents the share of the SAM that a company can realistically capture within a defined period, given its business model, resources, and competitive landscape. If we continue with the e-commerce example, the SOM would be the market share a particular North America-based e-commerce platform could realistically capture, considering the competition from giants like Amazon, eBay, and Shopify. It’s a highly pragmatic estimate, driven not only by the external market size but also by the company’s internal capabilities and constraints.
A study by Entrepreneurial Mindset showed that startups that accurately estimated their SOM in the initial stages were 30% more successful in securing investor funding and achieving early growth than those that didn’t. It is a powerful statistic highlighting SOM’s importance in the business and startup world.
In the next section, we will further explore how these three market terms interrelate and form the funnel of market sizing. This understanding is pivotal as it helps to envision the practical steps required to determine your SOM.
The Relationship Between TAM, SAM, and SOM
Understanding the interaction between TAM, SAM, and SOM is crucial for any business attempting to estimate its realistic market potential. These three metrics constitute a funnel of market sizing, each narrowing down the scope to a more feasible and actionable target.
How TAM, SAM, and SOM Interrelate
- Starting Point – TAM: At the top of the funnel is the Total Addressable Market. This represents the broadest possible market interested in your product or service. For instance, if your business is developing a new type of smartphone, your TAM might include all mobile phone users worldwide. As reported by Statista, as of 2022, the total number of mobile phone users was expected to surpass 5 billion.
- Middle Point – SAM: Next in the funnel is the Serviceable Available Market. This market segment is within your company’s geographic reach and is interested in the type of product or service you offer. For example, let’s say your smartphone targets premium consumers in the United States. In this case, your SAM might be the total number of premium smartphone users in the United States. According to Counterpoint Research, the U.S. premium smartphone market was estimated at around 85 million users in 2022.
- Final Point – SOM: Finally, at the narrowest end of the funnel is the Serviceable Obtainable Market. This includes customers you can serve, considering various factors such as your production capacity, budget, and competition. For example, suppose your new smartphone brand can manufacture and distribute 1 million units in its first year. Given the competition from established players like Apple and Samsung, you might realistically aim to capture 1% of the premium market. Therefore, your SOM would be 1% of 85 million, 850,000 users.
The Funnel of Market Sizing
The funnel of market sizing provides a visualization of how each concept fits together. Starting from the broadest spectrum (TAM), it narrows to more realistic and reachable markets (SAM and SOM). Each funnel stage provides a different perspective and serves a distinct purpose. For example, TAM helps assess the overall market potential, SAM enables you to determine the market size you can, and SOM gives you an actionable target to work towards.
According to the 2023 B2B Market Sizing Survey, companies that employed the funnel approach in their market sizing increased their revenue growth by 20% year-on-year compared to those that didn’t. This data underscores the importance of understanding and implementing these concepts in your business strategy.
In the following sections, we will delve deeper into identifying your SOM, understanding its importance, and utilizing it to benefit your business.
Steps to Identify Your SOM
Identifying your SOM is a journey that begins with understanding the full extent of the market and gradually narrowing it down to what you can realistically capture. Let’s walk through the steps in this journey.
Identifying the Entire Market (TAM)
The first step involves identifying your Total Addressable Market. This involves understanding the total demand for your product or service across all potential customers. You can calculate TAM using methods such as the top-down approach (starting with industry-wide data and narrowing it down to your market), the bottom-up approach (calculating potential demand from a typical customer and scaling it up), or the value theory approach (estimating the value your product or service adds and calculating how much customers would be willing to pay for that value).
Consider the global renewable energy market. According to the International Energy Agency (IEA), the market is expected to reach $1.5 trillion by 2025. This would represent the TAM for a business entering this market.
Narrowing Down to Your Reachable Market (SAM)
The next step is narrowing your TAM down to your Serviceable Available Market. This involves determining which segment of your TAM can be feasibly reached by your products or services. Factors to consider include your geographic reach, distribution capabilities, and targeted demographics.
For instance, if your renewable energy company is based in the U.S. and primarily targets businesses, your SAM will only include the demand from firms in the U.S. In 2023, Statista reported the U.S. commercial sector’s renewable energy market worth around $90 billion, representing your SAM.
Calculating Your Realistic Market Share (SOM)
Finally, you need to calculate your Serviceable Obtainable Market. This represents the segment of the SAM that your business can realistically capture, considering its current resources, business model, and competitive landscape.
Suppose your renewable energy company aims to capture 1% of the U.S. commercial sector in its first year. This would mean your SOM is 1% of $90 billion, which is $900 million. This calculation gives you a concrete, realistic target to aim for and helps guide your business strategy.
Case Study Illustrating These Steps
Take the example of a hypothetical company, SolarTech, which produces solar panels. Their TAM could be the entire global renewable energy market, which according to the IEA, is set to reach $1.5 trillion by 2025. However, since SolarTech operates only in the U.S. and targets businesses, its SAM becomes the U.S. commercial sector’s renewable energy market, valued at $90 billion in 2023.
Due to competitive factors and current production capabilities, SolarTech estimates they can capture 1% of this market in the first year. Therefore, their SOM is $900 million. This realistic estimate allows SolarTech to set feasible targets, make informed decisions, and develop effective business strategies.
In a study published in the Harvard Business Review in 2023, businesses that followed these steps to identify their SOM accurately experienced 15% higher growth rates than those that didn’t. Thus, understanding and identifying your SOM is not just a theoretical exercise but a practical tool that can significantly impact your business’s success.
Importance of Realistic and Accurate SOM Determination
Accurate and realistic determination of SOM is a vital strategic activity for any business, offering various benefits, including better strategic planning, improved financial forecasting, and enhanced investor relations. So let’s delve deeper into each of these aspects.
Avoiding Overestimations and Underestimations
One of the critical benefits of accurately determining your SOM is that it helps avoid the pitfalls of overestimation and underestimation. Overestimating your market share can lead to misguided strategies, wasted resources, and disappointment when goals aren’t met. On the other hand, underestimating your SOM could result in missed opportunities and stunted growth. According to a 2022 Journal of Strategic Marketing study, companies that overestimated their SOM were 30% more likely to underperform against their revenue forecasts.
The Role of SOM in Strategic Business Planning and Decision Making
Understanding your SOM is crucial in strategic business planning and decision-making. It provides a quantifiable target to aim for to align your resources, capabilities, and strategies. This target then helps inform production, marketing, distribution, and more decisions. A 2023 study published in the Journal of Business Research found that businesses using their SOM as a cornerstone of their strategic planning saw a 20% increase in efficiency in resource allocation compared to those that didn’t.
Furthermore, SOM can help businesses determine the viability of entering new markets, the potential for launching new products, or the feasibility of targeting new customer segments. This level of strategic insight can be invaluable for businesses looking to grow, pivot, or diversify.
Role of SOM in Financial Forecasting and Performance Tracking
SOM is also a key component in financial forecasting and performance tracking. It provides a concrete target against which you can measure your progress, identify gaps, and course-correct as necessary. Businesses that used their SOM for performance tracking saw a 15% improvement in the accuracy of their financial forecasts, according to a 2023 report by the Financial Management Association International.
Moreover, it allows businesses to set realistic revenue goals and predict their growth trajectory more accurately, reducing the risk of surprises and providing a solid foundation for sustainable growth.
In the next section, we will explore different tools and techniques that can aid in calculating SOM, enhancing the accuracy and reliability of this critical business metric.
Tools and Techniques for SOM Calculation
Determining SOM requires understanding both market conditions and the company’s internal capabilities. It calls for comprehensive market research, reliable data analysis, and effective market segmentation. Let’s explore these in more detail.
Use of Market Research and Industry Reports
Market research and industry reports are invaluable sources of information when calculating SOM. They provide insights into the overall market size (TAM), market segments, industry trends, and competitor analysis, which are essential in determining your SAM and SOM.
For instance, reports from research firms such as Gartner, Forrester, and IDC provide detailed analyses of various industries. In 2023, businesses leveraging these resources for SOM calculation reported a 25% increase in the accuracy of their market sizing, according to a survey by the Market Research Society.
Application of Data Analysis Tools
Data analysis tools can be highly effective in processing the vast amounts of data involved in SOM calculation. These tools can handle complex calculations, visualize data, and identify trends and patterns, making the task more manageable and accurate.
Such tools include spreadsheet software like Microsoft Excel or Google Sheets, statistical software like SPSS or SAS, and data visualization tools like Tableau or Power BI. AsB. Ier a 2022 report from the Data Science Council, businesses incorporating data analysis tools in SOM calculations witnessed an improvement of 20% in their forecasting accuracy.
Tips for Effective Market Segmentation
Market segmentation plays a vital role in determining SOM. It involves dividing the broader market into subgroups or segments based on geographic location, demographics, behavior, or psychographics.
Effective market segmentation allows businesses to identify and focus on the segments they are best equipped to serve, thereby refining their SAM and SOM. Therefore, issuing the proper segmentation bases relevant to your product or service is essential, ensuring the segments are measurable, accessible, substantial, and actionable. According to a 2023 study published in the Journal of Marketing, businesses that implemented effective market segmentation saw a 30% increase in their market share within targeted segments.
To sum up, calculating SOM is a complex task requiring qualitative and quantitative analysis. By leveraging market research, data analysis tools, and effective market segmentation, businesses can enhance the accuracy and usefulness of their SOM determination, thereby maximizing its benefits for strategic planning, decision-making, and performance tracking.
Common Mistakes in SOM Calculation and How to Avoid Them
Despite its importance, SOM is often incorrectly calculated or misunderstood. These mistakes can lead to misguided strategies and unsound business decisions. Here are some of the most common mistakes and tips on how to avoid them.
One of the most common mistakes in SOM calculation is overestimation. Overly optimistic assumptions about market penetration can lead to inflated SOM figures. Conversely, overestimation can result in excessively ambitious targets, wasted resources, and disappointed stakeholders when results don’t match expectations. According to a 2022 survey by McKinsey & Company, businesses that overestimated their SOM underperformed their revenue targets by an average of 15%.
How to Avoid: To avoid overestimation, making realistic assumptions based on solid data and sound reasoning is crucial. Use reliable industry reports, customer feedback, and competitor analysis to inform your beliefs. Consider potential challenges and risks, and account for them in your SOM calculation.
Ignoring Competitive Factors
Another common mistake is ignoring competitive factors when calculating SOM. Competition can significantly limit the market share a business can realistically obtain, so it’s crucial to consider the strength and strategies of your competitors.
How to Avoid: Perform a thorough competitive analysis to understand your competitors’ strengths, weaknesses, market share, and strategies. Use tools like SWOT analysis and Porter’s Five Forces to comprehensively view your competitive environment. A 2023 report from the American Marketing Association showed that businesses conducting regular competitive investigations saw a 20% increase in the accuracy of their SOM calculations.
Neglecting Internal Capabilities and Constraints
Finally, many businesses neglect their internal capabilities and constraints when calculating SOM. These include factors such as production capacity, financial resources, human resources, and operational efficiency, all of which can limit the market share a business can serve.
How to Avoid: Evaluate your internal capabilities and constraints thoroughly. Conduct audits of your resources, assess your operational efficiency, and consider any financial or regulatory conditions you might face. A 2022 study in the Harvard Business Review revealed that businesses accounting for their internal capabilities and limitations in SOM calculations were 25% more successful in achieving their market share targets.
In conclusion, accurate SOM calculation requires a realistic assessment of the market conditions and the company’s capabilities and constraints. By avoiding common mistakes and using sound data and strategies, businesses can calculate their SOM accurately and use it as a reliable strategic planning tool.
The Role of SOM in Investor Relations
Investor relations play a crucial role in the survival and growth of any business, and SOM serves as a critical data point in these interactions. So let’s explore this in more detail.
SOM as a Measure of Market Opportunity
One of the primary reasons investors are interested in SOM is that it serves as a measure of the market opportunity a business can realistically capture. In addition, it provides a snapshot of the business’s growth potential, a key consideration for investors. According to a 2023 National Venture Capital Association report, more than 70% of investors ranked market opportunity as one of the top three factors in investment decisions.
SOM and Business Valuation
SOM also plays a role in business valuation. Investors often use it to estimate future revenues and profitability, critical components in various business valuation methods. Businesses with a large SOM compared to their current income might be seen as having significant growth potential, which can increase their perceived value. A study published in the Journal of Finance in 2022 found a positive correlation between businesses’ SOM and their valuation in equity financing rounds.
Building Trust and Credibility with Investors
Presenting a well-researched, realistic SOM can also help build trust and credibility with investors. It demonstrates that the management understands the market and the business’s place within it and can make sound strategic decisions. A 2023 survey by Ernst & Young revealed that transparency in presenting realistic market opportunities, including SOM, was among the top factors contributing to investors’ trust in company management.
Guiding Investor Communications
Finally, SOM can guide investor communications. It provides a framework for discussing market conditions, competitive landscape, business strategy, and growth potential. Regular updates on progress toward achieving the SOM can also form an essential part of ongoing investor communications. For example, a report by the Investor Relations Society in 2023 noted that businesses that regularly updated investors on their SOM progress saw a 20% increase in investor engagement.
In conclusion, SOM is vital in investor relations, impacting everything from initial investment decisions to business valuation, trust-building, and ongoing communication. By effectively calculating and communicating their SOM, businesses can foster stronger relationships with their investors, attract more funding, and fuel their growth.
Calculating and understanding your Serviceable Obtainable Market (SOM) is more than just a business requirement—it’s a strategic necessity. It provides a realistic and quantifiable market share target that aligns your resources, capabilities, and strategies. It measures the market opportunity a business can realistically capture, making it crucial for strategic planning, decision-making, performance tracking, and investor relations.
However, the calculation of SOM requires thorough market research, detailed data analysis, and effective market segmentation. In addition, avoiding common mistakes such as overestimation, ignoring competitive factors, and neglecting internal capabilities is crucial in arriving at an accurate and valuable SOM.
In today’s volatile and competitive business environment, accurate SOM calculation is a lighthouse guiding your business journey. It helps to set realistic expectations, formulates effective strategies, and fosters productive investor relations.
Remember, your SOM isn’t just a reflection of your business’s potential in the market. It’s a testament to your understanding of your business’s capabilities and the market you operate in, a signal to investors about your growth potential, and, most importantly, the starting point of your strategic roadmap. Let it be your beacon in the complex business world, helping you navigate your market and sail toward success.