Serviceable Obtainable Market

Serviceable Obtainable Market (SOM) is a marketing tool for market segmentation analysis. It estimates the revenue a company can earn from a specific segment that it can realistically capture. The purpose of SOM is to help companies determine achievable sales volume in a market, given available resources (financial, logistical, manpower, etc).

The SOM analysis helps businesses determine and meet growth targets in existing business conditions. In addition, firms can also estimate the revenue they might be able to generate in the right marketplace for newly launched products. Developing strategies to capture and hold the required position in such markets is possible through realistic SOM computation.

• Serviceable Obtainable Market (SOM) helps determine the business volume or revenue a company can expect to earn by selling or launching products in a particular market segment or niche.
• It focuses only on the niche market or the segment a company can easily capture based on its current resources (particularly financial). It helps achieve short-term goals pertaining to sales volume and revenue for a given product.
• SOM is a subset of the Serviceable Available Market (SAM). Both SAM and SOM are subsets of the Total Addressable Market (TAM).
• The formula for SOM is the previous year's market share multiplied by the current year's SAM. The primary application of SOM is seen in startups.

Serviceable Obtainable Market (SOM) is part of the Serviceable Available Market (SAM), while SAM is a subset of the Total Addressable Market (TAM). Since SOM is the smallest part of TAM, it is also smaller than SAM.

As indicated in the diagram above, TAM is the total market available to businesses, but companies cannot capture every market. Due to this, they may consider the SAM, which yet again has a smaller geographical scope than the former. Hence, converting customers based on SAM may or may not be achievable.

This is when the smallest part, i.e., SOM, focused on a particular segment is considered to be captured with the available resources and through reasonable efforts. Given this segmented reach, this is the market most startups and growing companies concentrate on.

During market segmentation, the SOM helps extract data pertaining to a single or major market segment relevant to the company. These metrics offer an outlook (anticipated outcomes) on every segment across the different growth stages of a product. However, it is not static.

The SOM estimates or predictions change when the period of analysis changes and must be viewed independently while making market or marketing decisions for a given period. This is because customers in a specific market accept or reject products based on their needs. Hence, the demand graph typically behaves differently for different products. Also, not all products gain popularity in the same period.

While some products may be popular at all times, others may have seasonal or trend-based demand. Based on the product and the existing demand for it, key market-related metrics, such as target audience, change.

Uses

Serviceable Obtainable Market is particularly useful when businesses launch new products. It helps them understand which market segment is beneficial or provides the best returns. In short, they get a sense of their target audience. The potential market size can be determined using the serviceable obtainable market formula.

Businesses may also use serviceable obtainable market calculations for future cash flow projections. Detecting gaps and communicating requirements internally is a key aspect of SOM that facilitates course correction whenever needed.

Another interesting use of SOM is in the field of finance. Enterprises in need of money to fund their ventures may use SOM to present revenue projections to financiers. Raising capital or securing seed financing is possible through such efforts. Often, startups use the serviceable obtainable market calculation to highlight their niche. It shows investors what they can expect as return on investment (ROI).

Hence, companies can use SOM for various business activities such as product launches, market identification, brand management, competitor analysis, etc. Such strategies help businesses achieve short-term goals and contribute to wealth building in the long run. However, certain limitations exist. The SOM method may not give accurate results in cases where multiple market segments are considered for computation.

In this section, we will study the serviceable obtainable market formula.

SOM = (Market share of the previous year x Service Available market (SAM) of the current year)

Here,

SAM refers to the percentage of the market captured by the product in terms of geographics and demography. It is a subset of the Total Addressable Market (TAM). To calculate SAM, TAM is multiplied by Annual Customer Value (ACV). Further, the total value of customers in the market is multiplied by the Annual Customer Value (ACV).

Last year's market share gets divided by the previous year's SAM.

However, there may be instances when a business does not generate revenues. This issue is common with startups. As a result, startups estimate growth. They estimate revenues they might produce in a given year.

Let us look at some serviceable obtainable market examples to understand the concept better.

Example #1

Assume Company A, a local manufacturer in Texas, US, manufactures television sets. The management is trying to determine the market they should cover and decides to conduct market research. Market segmentation is part of this research plan. 

Through this study, they realize that covering a specific segment will be more beneficial since bigger players already dominate a huge geographical area in the US, including Texas. The management also understands that the advent of technology in the electronics field has made it difficult for small companies to compete with corporate giants. 

Keeping these points in mind, the research team submitted SOM estimates after carefully studying the TAM and SAM figures. Hence, based on the product type, the existing market dynamics, and the available resources, the team fittingly used the SOM market segmentation methodology to recommend the right marketspace Company A should ideally target to make profits.

Example #2

Suppose Jess and Coana are two entrepreneurs with almost ten stores nationwide. The former sells a healthy alternative to popcorn in the market. In contrast, the latter owns a business of recycled shoes. While Jess has operated in the market for the past two years, Coana has been there for five years.

Following are their details:

Jess:

Total customers - 6000 (only 3500 live in the country; the rest reside in other countries).

Annual value per customer - $1000

Total revenues - $4 million

Previous year's revenues - $3.5 million

Last year's SAM - $3.6 million

Coana:

Total customers - 10,000 (only 6000 live in the country; the rest reside in other countries).

Annual value per customer - $1500

Total revenues - $6 million (annually).

Previous year's revenues - $5 million

Last year's SAM - $4 million

Calculation - Jess:

TAM = Total customers * ACV

          = 6000 * 1000

          = $6 million

SAM = Target Customers * ACV

          = 3500 * 1000

          = $3.5 million

SOM = Previous year's market share (%) * Current year's SAM

          = ($3.5/$3.6) * $3.5

          = 0.972 * 3.5

          = $3.4 million

Calculation - Coanna:

TAM = Total customers * ACV

          = 10,000 * 1500

          = $15 million

SAM = Target Customers * ACV

          = 6000 * 1000

          = $6 million

SOM = Previous year's market share * Current year's SAM

          = ($5/$4) * $6

          = 1.25 * 6

          = $7.5 million

In the above SOM example, $3.4 million and $7.5 million are the expected revenue figures from their respective market segments.

SOM is a subset of the Serviceable Available Market (SAM). They differ in the following ways:

This has been a guide to What Is Serviceable Obtainable Market. We explain how to calculate it, its examples, & comparison with serviceable available market. You can learn more about it from the following articles –

• Market Positioning
• Financial Modelling for Startups
• Minsky Moment