Serviceable obtainable market (SOM)
A startup statistic for all founders
Photo by Tim Mossholder on Unsplash
You read about TAM and SAM earlier. This is in continuation with the previous discussion.
The serviceable available market also known as the Serviceable addressable market (SAM) represents the total market that is available to a startup, while the serviceable obtainable market (SOM) represents the portion of the SAM that a startup can realistically target and serve with its products or services.
It is a subset of the serviceable available market (SAM), which represents the total market that is available to a startup. The SOM takes into account constraints such as the startup's target audience, pricing strategy, distribution channels, and competition.
The SOM is an important consideration in the valuation of a startup because it helps investors and analysts understand the potential growth opportunities for the startup. A startup with a larger SOM is generally considered to have more potential for growth and therefore may be valued more highly than a startup with a smaller SOM.
How to calculate the serviceable obtainable market (SOM).
Some common approaches:
Market research: Startups can conduct market research to gather data on the size and characteristics of their target market. For example, a startup selling organic snacks may conduct a survey of consumers to gather data on their purchasing habits and preferences. This data can be then used to estimate the size of the SOM for the organic snack market.
Customer segmentation: Startups can segment their target market into smaller groups based on factors such as demographics, geographic location, and purchasing behaviour. For example, a startup selling outdoor gear may segment its market into groups such as hikers, campers, and backpackers, and analyse the size of each segment to estimate the SOM for each subgroup.
Market share analysis: Startups can analyse their current market share and estimate the potential size of their SOM based on the portion of the total addressable market (TAM) they believe they can realistically capture. For example, if a startup has a 10% market share in the organic snack market and estimates that it can capture an additional 5% of the market, it may estimate its SOM to be $15 million (assuming the total addressable market for organic snacks is $100 million). This method involves analysing data on the startup's current market share and making assumptions about its potential to capture additional market share. (Discussion on market share calculations to come later)
Market sizing models: Companies can use market sizing models to estimate the potential size of their SOM. These models typically involve making assumptions about the size and growth of the market, the startup's target audience, and its pricing and distribution strategies. For example, a startup selling outdoor gear may use a market sizing model to estimate the potential size of the SOM for the camping gear market based on data on the number of campers in a given region and the average amount they spend on camping gear each year.
Sales forecasting: Companies can use sales forecasting techniques to estimate the potential size of their SOM based on their expected sales growth. This can involve analysing historical sales data, market trends, and other factors to predict future sales. For example, a startup selling organic snacks may use sales forecasting to estimate the potential size of its SOM based on its expected growth in sales of its top-selling products.
It's important to note that calculating the SOM is an iterative process and may involve using multiple methods and sources of data. Companies may need to revise their estimates of the SOM as they gather more information and their business develops.
There are several ways in which the SOM can influence the valuation of a startup:
Market size: A larger potential customer base would lead to a larger SOM which generally indicates that it can lead to higher revenues and profits. For example, a startup with a SOM of $100 million is likely to be valued more highly than a startup with a SOM of $50 million, all else being equal.
Market growth: A market with high growth potential is generally more attractive to investors and may be valued more highly. For example, a startup targeting a market that is expected to grow by 20% per year may be valued more highly than a startup targeting a market that is only expected to grow by 5% per year.
Competition: Being more lucrative, a startup with a large SOM may invite more competition, which could impact its ability to enhance market share and achieve profitability. For example, a startup with a SOM of $100 million may face more competition than a startup with a SOM of $50 million, which could impact its valuation. That said lack of competition may also put a question on startup potential.
Market segmentation: A startup targeting a specific niche within a larger market may be valued differently than a startup targeting the entire market. For example, a startup targeting the high-end luxury bike market may be valued differently than a startup targeting the budget bike market.
Product or service differentiation: A startup offering a unique product or service within a larger market may be able to command a higher valuation. For example, a startup with a patented technology or a unique business model may be valued more highly than a startup with a more commoditised product or service.
There is nothing more painful than seeing founders struggle with these so hopefully, the information above will reduce some confusion. More on the startup statistics later. Please do reach out to me if you have any further questions.
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© Sameer Babbar
sbabbar@sameerbabbar.com
Disclaimer: This is for information only. It does not take into account your own objectives, financial situation or needs. Author, his company his associates, his directors, his staff, his consultants, and his advisors do not accept liability for any loss or damage, including without limitation, any loss, which may arise directly or indirectly from the use of or reliance on the information provided.