SOM, or the Serviceable Obtainable Market, is a crucial concept for all businesses.
It represents the portion of the market that a company can realistically capture with its products or services.
Understanding SOM is vital as it serves as a realistic target to aim for in your business planning.
This article will dive into the key elements of SOM analysis and why they matter for your business growth and success.
What is SOM
Serviceable Obtainable Market (SOM) refers to the portion of the market that your business can realistically capture. It plays a crucial role in every aspect of business planning. SOM, TAM (Total Addressable Market), and SAM (Serviceable Available Market) are three different measures that business owners often get confused about. While TAM is the total market demand for a product or service, SAM narrows down TAM to the segment your products or services can serve. In contrast, SOM is the part of SAM that you can realistically achieve within a specific time frame.
To calculate your SOM, you need to follow a few simple steps. First, you have to determine your market size, which you can obtain through market research. Then estimate how much of this market you can realistically capture. It's important here to make realistic estimates, not overly ambitious ones.
Misconceptions about SOM
A common mistake businesses make when estimating their SOM is overestimation, which can lead to poor decision-making and financial losses. Remember, SOM isn't about how much of the market you'd like to capture, but about how much you can reasonably expect to capture. Therefore, maintaining conservative and realistic SOM figures is key.
Real-Life Applications of SOM Analysis
In the world of business, understanding the Serviceable Obtainable Market (SOM) is crucial. Here's why:
SOM in Setting Realistic Targets - A company needs targets for growth. But these targets must be achievable. Estimating SOM gives us a picture of possible sales. This way, we make sure our targets are realistic.
SOM's Role in Market Share Estimation - How much of the market can we serve? That's a key question. Knowing our SOM helps us answer it. It shows us what share of the market we can expect to capture.
Influence of SOM on Marketing Strategies - What customers should we target? What should our message be? These are marketing questions. The answers come from our SOM. It guides our marketing strategy.
Importance of SOM in Attracting Investments - Investors want to see potential. They want their money to grow. Show them a big SOM, and they’ll see a chance for big returns.
Interpreting SOM Figures - But investors are also savvy. They don't just look at the size of your SOM. They also look at how realistic it is. So your SOM needs to be both big and believable.
Use of SOM in Evaluating Business Potential - Ultimately, investors use SOM to judge your business. They want to know if you can serve your market. Show them a solid SOM, and they'll see a solid business.
Impact of SOM on Operational Strategies - Every day, businesses make decisions. These can be about what products to develop or where to invest resources. Knowing our SOM helps us make these decisions better.
Use of SOM in Resource Allocation - Resources are finite. We need to use them where they will have the most impact. Our SOM guides us in this. It shows us where we have the best chance of success.
Influence of SOM on Decision-Making Process - In the end, SOM is a tool for decision-making. It doesn't give us all the answers. But it gives us a starting point. And that's often just what we need.
Factors Influencing SOM
Knowing the size of your Serviceable Obtainable Market (SOM) depends on a few key factors. Today, we will delve into those crucial elements, starting with Market Size and Reach.
Market Size and Reach
The bigger the market size, the larger the SOM is likely to be. However, this isn't always a guarantee of success.
It's not only about how big the market is, but also how much of it you can realistically reach with your products, services, and marketing efforts. This is what we call market reach.
Also, pay close attention to market saturation. A crowded market might limit your SOM, even if the market size is large.
Next, we have the Product Nature. This factor correlates directly to your SOM.
Different product types have different SOMs. For example, a unique, innovative product might have a larger SOM in a market craving innovation.
Where your product is in its life cycle can also impact SOM. New, trending products might have a larger SOM compared to aging ones that are on the way out.
Lastly, how different your product is from others in the market (product differentiation) plays a role too. Unique, standout products can potentially command a larger SOM.
The last key factor is the Competitive Landscape.
The level of competition can either increase or decrease your SOM. More competitors usually mean a smaller piece of the pie for everyone.
If you have a clear competitive advantage, you can probably secure a larger SOM.
The type of market structure (monopoly, oligopoly) can significantly influence your SOM. In monopolies or oligopolies, one or few players usually dominate the market, leaving a smaller SOM for others.
In summary, understanding these three factors—market size and reach, product nature, and competitive landscape—can help you better estimate your Serviceable Obtainable Market. This knowledge is invaluable for accurate business planning and strategy setting.
Common SOM Calculation Methods
When it comes to calculating your Serviceable Obtainable Market (SOM), there are two main approaches you can choose from: Top-down and Bottom-up. These methods can help you get a clear, realistic idea of your market potential.
What is top-down SOM calculation?
In a top-down SOM calculation, you start with the big picture. This means you begin with the total market size and then deduct segments of the market your business can't reach. Often, this is due to factors like geographical location, product relevance, or other market conditions.
Strengths and weaknesses of the top-down method
The top-down approach is straightforward and relatively easy to execute. You only need broad market data, which makes it less time-consuming. However, it can sometimes lead to overestimation of your SOM due to its focus on the broader market rather than specific details.
Steps in conducting a top-down SOM analysis
Start with the total addressable market (TAM).
Subtract the portions of the market you can't service.
The remaining value is your SOM.
Definition of bottom-up SOM calculation
The bottom-up method takes a more detailed and targeted approach. It involves analyzing your company's capabilities and resources, then estimating your market potential based on these factors. It considers the actual number of customers you can reach and serve effectively.
Strengths and weaknesses of the bottom-up method
The bottom-up method provides a more detailed and accurate estimation of your SOM. It factors in the practical realities of your business operations. However, it can be time-consuming as it requires a thorough analysis of your business capacity and the market.
Procedure for bottom-up SOM analysis
Identify your target customer group.
Estimate the number of customers you can realistically reach and serve.
Multiply this figure by the average revenue per user. This gives your SOM.
In summary, both top-down and bottom-up approaches have their strengths and limitations. It's important to choose the method that best aligns with your business needs and resources.
Case Study: SOM Analysis in Different Industries
In the restaurant sector, Serviceable Obtainable Market (SOM) analysis is a vital tool. It helps restaurant owners target their service to the right market. Local market dynamics play a big role too. A restaurant in a busy urban area has a larger SOM than one in a quiet rural location.
Even in a packed market like the food industry, you can still work out your SOM. It's all about looking at your specific niche. Say you own a vegan restaurant. Your SOM is the total number of people seeking out vegan options in your area.
SOM also plays a key role in the strategy of tech startups. The tech market changes rapid-fire fast. So, SOM is likely to shift a lot too. But even with this change, SOM can still guide your startup's direction.
Calculating SOM in an industry as fast as tech can be tough. The secret is staying up-to-date with the latest trends and changes. You need to know the size of your current market, and be ready to adapt if it shrinks or grows.
In both the restaurant industry and the tech startup world, SOM is super important. It helps business owners focus their efforts, and gives them a clear target market to aim for. With smart use of SOM analysis, even in a saturated or fast-changing market, businesses can thrive.
Pitfalls in SOM Analysis
One major pitfall in SOM analysis is the overestimation of market share. It's quite common for businesses to assume they can capture a larger portion of the market than is realistic. This overestimation can skew business planning, leading to overly ambitious strategies that may not come to fruition. To avoid this, it's crucial to use solid market research when estimating your SOM and to be conservative in your estimates.
Another trap that businesses fall into when performing SOM analysis is ignoring market trends. If you're not keeping up with what's happening in your industry, you could find yourself with a poor understanding of your actual obtainable market. Remember, market trends can significantly influence your SOM. Thus, always factor in current and anticipated trends when performing your SOM calculation.
Lastly, there's the risk of underestimating competition. When calculating your SOM, it's easy to overlook or underestimate the impact of your competitors. However, doing so can lead to an inflated view of your market potential. It's important to consider all your rivals, including those indirect ones, when determining your SOM. This will give you a more accurate reading and prevent any nasty surprises.
Let's go over what we've learned so far:
SOM analysis is a crucial tool that businesses utilize when crafting their strategies.
We've discussed two main methods of SOM calculation: the top-down and bottom-up approaches.
Several things can shape SOM, such as market size, product type, and competition.
Now, it's time to put this knowledge into action:
Don't just read about SOM analysis - start using it for your business plans.
It's essential to be realistic when estimating SOM as overstating or understating can lead to incorrect decisions.
SOM analysis isn't a one-off task. To keep your strategies relevant, you have to continuously learn from the market and adjust your calculations.
Before we wrap up, here are some last points to consider:
Keep in mind that SOM trends may shift. Be ready to adapt your business plans accordingly.
The role of SOM cannot be overstated - it directly impacts your business operations.
Lastly, remember to regularly review and fine-tune your SOM figures. With the ever-changing market conditions, this diligence will help your business stay ahead.
Frequently Asked Questions
What are the common errors in understanding SOM?
Sometimes, people think that the bigger the SOM, the better. However, an overly large SOM can indicate an unrealistic business plan. It is also common for people to misinterpret SOM as the total market share a company can achieve, but in fact, it refers to the portion of the market that can be realistically reached.
Are there any myths regarding SOM calculation?
Yes, one common myth is that SOM can only be calculated using sophisticated tools and techniques. But in reality, even a basic knowledge in mathematics and a good understanding of the market can help calculate SOM.
Why is a realistic estimate so important in SOM analysis?
A realistic estimate is crucial because it helps businesses set achievable goals and targets. An inaccurate, usually overestimated SOM, can often lead to unrealistic expectations and poor decision-making.
How does SOM influence marketing strategies?
SOM helps companies understand the size of their reachable market. This information is vital while formulating marketing strategies as it provides direction on where to focus resources to maximize returns.
Can different types of products have different SOMs in the same market?
Absolutely! The SOM is greatly influenced by the nature of the product. For example, a unique product with little competition may have a higher SOM compared to a common product in a saturated market.
How does a monopoly or oligopoly affect SOM?
In markets where a single company or a small number of companies have a significant share, the SOM for new entrants can be very low. These dominant players can use their market power to block new entrants, thereby reducing their SOM.
What's a noteworthy aspect in the application of SOM in tech startups?
Tech startups operate in fast-paced industries where market dynamics can change rapidly. Therefore, they must regularly update their SOM analysis to respond to these changes and stay competitive.
Is underestimating competition a serious pitfall in SOM Analysis?
Yes, underestimating competition can be a significant mistake in SOM calculation. If a business does not accurately factor in the competition, it may overestimate its market potential, leading to poor strategic decisions.
What is a practical tip for continuous learning and adaptation in SOM analysis?
One practical tip would be to regularly revisit and update the SOM analysis to reflect the current market conditions. This will ensure that the business planning remains grounded in reality and appropriately responsive to changes in the market.
How crucial is SOM's role in successful business operation?
SOM plays a vital role in successful business operation. It provides valuable insights on what portion of the market a company can realistically serve, helping guide strategic decisions such as resource allocation, target setting, and marketing strategies.