What is Serviceable Obtainable Market?
In the dynamic and competitive world of business, understanding market potential is crucial for strategic planning and growth. One of the key metrics in market analysis is the Serviceable Obtainable Market (SOM). This article delves into what SOM is, how it differs from other market metrics, its importance, methods of calculation, and its applications in business strategy.
Understanding Serviceable Obtainable Market (SOM)
Definition of SOM
The Serviceable Obtainable Market (SOM) is an estimate of the portion of revenue within a specific product segment that a company can realistically capture. It is derived from the Serviceable Available Market (SAM) and takes into account the company’s current market share, competition, resources, and sales capabilities. SOM provides a realistic target for what a business can achieve within a given market.
Difference Between TAM, SAM, and SOM
To fully grasp the concept of SOM, it is essential to differentiate it from two related market metrics: Total Addressable Market (TAM) and Serviceable Available Market (SAM).
- Total Addressable Market (TAM): The TAM represents the total revenue opportunity available if a business were to achieve 100% market share in a given market. It is a broad measure that does not consider the company's current limitations or competitive landscape.
- Serviceable Available Market (SAM): The SAM is the portion of the TAM that a business can realistically target and serve with its current products, services, resources, and capabilities. It considers practical aspects like distribution channels and operational capacity.
- Serviceable Obtainable Market (SOM): The SOM is the subset of the SAM that a business can realistically capture, considering its current market position, competition, and sales capabilities. It represents the most granular and conservative estimate of market opportunity.
Importance of SOM
Understanding and accurately defining your SOM is vital for several reasons:
1. Strategic Planning
SOM provides a realistic basis for strategic planning, allowing businesses to set achievable goals and allocate resources effectively. It helps identify which segments of the market are worth targeting based on current capabilities and competitive advantage.
2. Investment Decisions
For startups and growing businesses, SOM is crucial for attracting investors. Investors look for realistic market opportunities that a business can capture in the near term, making SOM a key factor in funding decisions and business valuations.
3. Marketing and Sales Strategy
Knowing your SOM helps in crafting targeted marketing and sales strategies. By understanding which parts of the market are obtainable, businesses can tailor their messaging, distribution channels, and sales efforts to maximize impact and conversion rates.
4. Resource Allocation
SOM helps businesses allocate their resources efficiently. By focusing on the most obtainable parts of the market, companies can ensure that their efforts and investments yield the highest returns.
How to Calculate SOM
Calculating SOM involves several steps, each requiring a thorough understanding of the market and the business's capabilities. Here’s a step-by-step guide:
Step 1: Define the Total Addressable Market (TAM)
Start by estimating the TAM for your product or service. This involves identifying the total market demand if there were no constraints on your ability to serve the entire market. Use industry reports, market research, and data analysis to determine the TAM.
Step 2: Determine the Serviceable Available Market (SAM)
From the TAM, determine the SAM by identifying the segments of the market that your business can realistically target and serve with its current products, services, resources, and capabilities.
Step 3: Analyze Market Share and Competition
Evaluate your current market share within the SAM and analyze the competitive landscape. Identify key competitors, their market positions, and their strengths and weaknesses relative to your business.
Step 4: Estimate the SOM
Based on the analysis of market share and competition, estimate the portion of the SAM that your business can realistically capture. This involves considering factors like sales capabilities, marketing reach, brand strength, and competitive differentiation.
Example Calculation
Assume a company sells a specialized software solution for the healthcare industry. The TAM for healthcare software in the U.S. is estimated to be $10 billion. The company targets mid-sized hospitals in urban areas, which account for 30% of the total market, making the SAM $3 billion. The company estimates it can realistically capture 10% of the SAM, resulting in an SOM of:
SOM=SAMĂ—Market Share EstimateSOM=SAMĂ—Market Share Estimate SOM=$3 billionĂ—0.10SOM=$3 billionĂ—0.10 SOM=$300 millionSOM=$300 million
Applications of SOM in Business Strategy
1. Market Entry Decisions
When entering a new market, understanding the SOM helps businesses assess whether the market is large enough to justify the investment. It ensures that companies are targeting segments where they can realistically compete and grow.
2. Product Development
SOM analysis can inform product development strategies by identifying unmet needs within obtainable market segments. This allows businesses to tailor their products or services to better meet the demands of their target audience.
3. Competitive Analysis
By analyzing the SOM, businesses can gain insights into the competitive landscape within specific market segments. This helps in identifying areas where competition is less intense and where there are opportunities for differentiation and market penetration.
4. Business Expansion
For businesses looking to expand, SOM provides a roadmap for identifying new opportunities within existing markets or in new geographic regions. It helps in prioritizing expansion efforts based on the potential market size and serviceability.
5. Performance Measurement
Tracking performance against the SOM allows businesses to measure how effectively they are capturing their target market. This can provide valuable feedback for refining strategies and improving market penetration over time.
Challenges in Defining SOM
While SOM is a valuable metric, it can be challenging to define accurately due to several factors:
- Data Availability
Accurate market data is crucial for estimating TAM and segmenting the market. In some industries, reliable data may be scarce or difficult to obtain, making it challenging to calculate SOM precisely.
- Changing Market Conditions
Market conditions are dynamic and can change rapidly due to technological advancements, regulatory changes, or economic shifts. These changes can impact the serviceability of certain market segments, requiring continuous monitoring and adjustment of SOM estimates.
- Competitive Landscape
The presence and actions of competitors can significantly influence the serviceability of a market segment. Understanding and anticipating competitive moves is essential for accurately defining and adjusting the SOM.
- Internal Capabilities
Accurately assessing your own capabilities and limitations is crucial for realistic SOM estimation. Overestimating your ability to serve certain segments can lead to missed targets and wasted resources.
Conclusion
In conclusion, the Serviceable Obtainable Market (SOM) is a critical metric for businesses aiming to make informed strategic decisions. By providing a realistic view of the market that a business can effectively capture, SOM helps in strategic planning, investment decisions, marketing strategy, and resource allocation. While calculating SOM involves challenges, it is an invaluable tool for driving business growth and achieving competitive advantage.
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